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Empirical Evidence of the Market Price of Risk for Delivery Periods

Author

Listed:
  • Annika Kemper

    (Center for Mathematical Economics (IMW), Bielefeld University, 33615 Bielefeld, Germany)

  • Maren Diane Schmeck

    (Center for Mathematical Economics (IMW), Bielefeld University, 33615 Bielefeld, Germany)

Abstract

In this paper, we provide empirical evidence of the market price of risk for delivery periods (MPDP) of electricity swap contracts. The MPDP enables an accurate pricing of such contracts in the presence of the delivery period such that the typical approximations can be avoided. In our empirical study, we focus on term-structure effects and identify the resulting MPDP. In presence of the Samuelson effect, we find the most pronounced MPDP close to maturity, while the MPDP disappears proportional to the Samuelson effect far away from maturity. Thus, our theory improves the pricing accuracy close to maturity.

Suggested Citation

  • Annika Kemper & Maren Diane Schmeck, 2025. "Empirical Evidence of the Market Price of Risk for Delivery Periods," Risks, MDPI, vol. 13(1), pages 1-20, January.
    • Handle: RePEc:gam:jrisks:v:13:y:2025:i:1:p:7-:d:1559951
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    References listed on IDEAS

    as
    1. Viviana Fanelli & Maren Diane Schmeck, 2019. "On the seasonality in the implied volatility of electricity options," Quantitative Finance, Taylor & Francis Journals, vol. 19(8), pages 1321-1337, August.
    2. Benth, Fred Espen & Paraschiv, Florentina, 2016. "A Structural Model for Electricity Forward Prices," Working Papers on Finance 1611, University of St. Gallen, School of Finance.
    3. Les Clewlow & Chris Strickland, 1999. "Valuing Energy Options in a One Factor Model Fitted to Forward Prices," Research Paper Series 10, Quantitative Finance Research Centre, University of Technology, Sydney.
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