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Joint econometric modeling of spot electricity prices, forwards and options

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  • Alain Monfort
  • Olivier Féron

Abstract

We propose a joint modeling of spot electricity prices, forwards prices and other derivative prices, using recent developments in discrete time asset pricing methods based on the notions of stochastic discount factor and of Compound Autoregressive (or affine) stochastic processes. We show that this approach provides quasi explicit formulae for forward and option prices, while allowing for a large flexibility in the modeling of dynamics, spikes and seasonality, both in the historical and the risk neutral worlds. We also propose a variety of inference techniques involving inversion methods, the Kalman filter and the Kitagawa–Hamilton filter. Finally, an application based on French spot prices and forward products is proposed. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Alain Monfort & Olivier Féron, 2012. "Joint econometric modeling of spot electricity prices, forwards and options," Review of Derivatives Research, Springer, vol. 15(3), pages 217-256, October.
    • Handle: RePEc:kap:revdev:v:15:y:2012:i:3:p:217-256
    DOI: 10.1007/s11147-012-9075-z
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    Cited by:

    1. Deschatre, Thomas & Féron, Olivier & Gruet, Pierre, 2021. "A survey of electricity spot and futures price models for risk management applications," Energy Economics, Elsevier, vol. 102(C).
    2. Shaw, Charles, 2020. "Regimes, Non-Linearities, and Price Discontinuities in Indian Energy Stocks," MPRA Paper 104798, University Library of Munich, Germany.
    3. Thomas Deschatre & Olivier F'eron & Pierre Gruet, 2021. "A survey of electricity spot and futures price models for risk management applications," Papers 2103.16918, arXiv.org, revised Jul 2021.
    4. Shaw, Charles, 2018. "Regime-Switching And Levy Jump Dynamics In Option-Adjusted Spreads," MPRA Paper 94154, University Library of Munich, Germany, revised 27 May 2019.

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    More about this item

    Keywords

    Electricity derivative pricing; Spikes; Car processes; Stochastic discount factor; Kitagawa–Hamilton filter; C10; C51; C58; G12;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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