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Volatility And Liquidity On High-Frequency Electricity Futures Markets: Empirical Analysis And Stochastic Modeling

Author

Listed:
  • MARCEL KREMER

    (Chair for Energy Trading and Finance, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany)

  • FRED ESPEN BENTH

    (Department of Mathematics, University of Oslo, P. O. Box 1053 Blindern, 0316 Oslo, Norway)

  • BJÖRN FELTEN

    (Chair for Management Science and Energy Economics, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany)

  • RÜDIGER KIESEL

    (Chair for Energy Trading and Finance, University of Duisburg-Essen, Universitätsstraße 12, 45141 Essen, Germany2Department of Mathematics, University of Oslo, P. O. Box 1053 Blindern, 0316 Oslo, Norway)

Abstract

This paper investigates the relationship between volatility and liquidity on the German electricity futures market based on high-frequency intraday prices. We estimate volatility by the time-weighted realized variance acknowledging that empirical intraday prices are not equally spaced in time. Empirical evidence suggests that volatility of electricity futures decreases as time approaches maturity, while coincidently liquidity increases. Established continuous-time stochastic models for electricity futures prices involve a growing volatility function in time and are thus not able to capture our empirical findings a priori. In Monte Carlo simulations, we demonstrate that incorporating increasing liquidity into the established models is key to model the decreasing volatility evolution.

Suggested Citation

  • Marcel Kremer & Fred Espen Benth & Björn Felten & Rüdiger Kiesel, 2020. "Volatility And Liquidity On High-Frequency Electricity Futures Markets: Empirical Analysis And Stochastic Modeling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 23(04), pages 1-38, June.
    • Handle: RePEc:wsi:ijtafx:v:23:y:2020:i:04:n:s0219024920500272
    DOI: 10.1142/S0219024920500272
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    Citations

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    Cited by:

    1. Ren'e Aid & Andrea Cosso & Huy^en Pham, 2020. "Equilibrium price in intraday electricity markets," Papers 2010.09285, arXiv.org.
    2. 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).
    3. Marcel Kremer & Rüdiger Kiesel & Florentina Paraschiv, 2020. "Intraday Electricity Pricing of Night Contracts," Energies, MDPI, vol. 13(17), pages 1-14, September.
    4. René Aid & Andrea Cosso & Huyên Pham, 2022. "Equilibrium price in intraday electricity markets," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 517-554, April.
    5. 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.

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