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A new approach to wind power futures pricing

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  • Markus Hess

Abstract

We propose a new model for the pricing of wind power futures written on the wind power production index. Our approach is based on an arithmetic multi-factor pure-jump Ornstein–Uhlenbeck setup with time-dependent coefficients. We express the wind power production index and the corresponding futures price in terms of Fourier integrals and derive the related time dynamics. We conclude the paper by an investigation of the risk premium associated with our wind power model.

Suggested Citation

  • Markus Hess, 2021. "A new approach to wind power futures pricing," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 1235-1252, December.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:2:d:10.1007_s10203-021-00345-8
    DOI: 10.1007/s10203-021-00345-8
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    References listed on IDEAS

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    1. Markus Hess, 2018. "Pricing Temperature Derivatives Under Weather Forecasts," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 21(05), pages 1-34, August.
    2. Huisman, Ronald & Kilic, Mehtap, 2012. "Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums," Energy Economics, Elsevier, vol. 34(4), pages 892-898.
    3. Benth, Fred Espen & Saltyte Benth, Jurate, 2009. "Dynamic pricing of wind futures," Energy Economics, Elsevier, vol. 31(1), pages 16-24, January.
    4. Markus Hess, 2016. "Modeling and pricing precipitation derivatives under weather forecasts," ULB Institutional Repository 2013/247729, ULB -- Universite Libre de Bruxelles.
    5. Anca Pircalabu & Jesper Jung, 2017. "A mixed C-vine copula model for hedging price and volumetric risk in wind power trading," Quantitative Finance, Taylor & Francis Journals, vol. 17(10), pages 1583-1600, October.
    6. Fred Espen Benth & Luca Di Persio & Silvia Lavagnini, 2018. "Stochastic Modeling of Wind Derivatives in Energy Markets," Risks, MDPI, vol. 6(2), pages 1-21, May.
    7. Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
    8. Markus Hess, 2016. "Modeling And Pricing Precipitation Derivatives Under Weather Forecasts," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(07), pages 1-29, November.
    9. Fred Espen Benth & Anca Pircalabu, 2018. "A non-Gaussian Ornstein–Uhlenbeck model for pricing wind power futures," Applied Mathematical Finance, Taylor & Francis Journals, vol. 25(1), pages 36-65, January.
    10. Fred Espen Benth & Jūratė Šaltytė Benth, 2012. "Modeling and Pricing in Financial Markets for Weather Derivatives," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 8457, December.
    11. Fred Espen Benth & Jūratė Šaltytė Benth, 2012. "Financial markets for weather," World Scientific Book Chapters, in: Modeling and Pricing in Financial Markets for Weather Derivatives, chapter 1, pages 1-13, World Scientific Publishing Co. Pte. Ltd..
    12. Fred E. Benth & Troels S. Christensen & Victor Rohde, 2021. "Multivariate continuous-time modeling of wind indexes and hedging of wind risk," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 165-183, January.
    13. Gersema, Gerke & Wozabal, David, 2017. "An equilibrium pricing model for wind power futures," Energy Economics, Elsevier, vol. 65(C), pages 64-74.
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    More about this item

    Keywords

    Wind power futures; Wind power production index; Arithmetic multi-factor model; Pure-jump Ornstein–Uhlenbeck process; Lévy-type process; Fourier transform; Stochastic differential equation; Risk premium;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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