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A multi-factor polynomial framework for long-term electricity forwards with delivery period

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  • Xi Kleisinger-Yu
  • Vlatka Komaric
  • Martin Larsson
  • Markus Regez

Abstract

We propose a multi-factor polynomial framework to model and hedge long-term electricity contracts with delivery period. This framework has several advantages: the computation of forwards, risk premium and correlation between different forwards are fully explicit, and the model can be calibrated to observed electricity forward curves easily and well. Electricity markets suffer from non-storability and poor medium- to long-term liquidity. Therefore, we suggest a rolling hedge which only uses liquid forward contracts and is risk-minimizing in the sense of F\"ollmer and Schweizer. We calibrate the model to over eight years of German power calendar year forward curves and investigate the quality of the risk-minimizing hedge over various time horizons.

Suggested Citation

  • Xi Kleisinger-Yu & Vlatka Komaric & Martin Larsson & Markus Regez, 2019. "A multi-factor polynomial framework for long-term electricity forwards with delivery period," Papers 1908.08954, arXiv.org, revised Jun 2020.
    • Handle: RePEc:arx:papers:1908.08954
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    References listed on IDEAS

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    Cited by:

    1. Peilun He & Nino Kordzakhia & Gareth W. Peters & Pavel V. Shevchenko, 2024. "PDSim: A Shiny App for Polynomial Diffusion Model Simulation and Estimation," Papers 2409.19385, 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. Fred Espen Benth, 2021. "Pricing of Commodity and Energy Derivatives for Polynomial Processes," Mathematics, MDPI, vol. 9(2), pages 1-30, January.
    4. 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.
    5. Annika Kemper & Maren Diane Schmeck, 2023. "The Market Price of Jump Risk for Delivery Periods: Pricing of Electricity Swaps with Geometric Averaging," Papers 2303.12527, arXiv.org, revised Dec 2023.
    6. Kemper, Annika & Schmeck, Maren Diane, 2023. "Pricing of Electricity Swaps with Geometric Averaging," Center for Mathematical Economics Working Papers 676, Center for Mathematical Economics, Bielefeld University.

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