Futures pricing in electricity markets based on stable CARMA spot models

Fred Espen Benth, Claudia Klüppelberg, Gernot Müller and Linda Vos

Energy Economics, 2014, vol. 44, issue C, 392-406

Abstract: We present a new model for the electricity spot price dynamics, which is able to capture seasonality, low-frequency dynamics and extreme spikes in the market. Instead of the usual purely deterministic trend we introduce a non-stationary independent increment process for the low-frequency dynamics, and model the large fluctuations by a non-Gaussian stable CARMA process. The model allows for analytic futures prices, and we apply these to model and estimate the whole market consistently. Besides standard parameter estimation, an estimation procedure is suggested, where we fit the non-stationary trend using futures data with long time until delivery, and a robust L1-filter to find the states of the CARMA process. The procedure also involves the empirical and theoretical risk premia which – as a by-product – are also estimated. We apply this procedure to data from the German electricity exchange EEX, where we split the empirical analysis into base load and peak load prices. We find an overall negative risk premium for the base load futures contracts, except for contracts close to delivery, where a small positive risk premium is detected. Peak load contracts, on the other hand, show a clear positive risk premium, when they are close to delivery, while contracts in the longer end also have a negative premium.

Keywords: CARMA model; Electricity spot prices; Electricity futures prices; Continuous time linear model; Lévy process; Stable CARMA process; Risk premium; Robust filter (search for similar items in EconPapers)
JEL-codes: C58 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:44:y:2014:i:c:p:392-406

DOI: 10.1016/j.eneco.2014.03.020

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