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Electricity Forward Curves with Thin Granularity: Theory and Empirical Evidence in the Hourly EPEX Spot Market

Fusai, G., Caldana, R. and Roncoroni, A. (2017). Electricity Forward Curves with Thin Granularity: Theory and Empirical Evidence in the Hourly EPEX Spot Market. European Journal of Operational Research, doi: 10.1016/j.ejor.2017.02.016

Abstract

We propose a constructive definition of electricity forward price curve with cross-sectional timescales featuring hourly frequency on. The curve is jointly consistent with both risk-neutral market information represented by baseload and peakload futures quotes, and historical market information, as mirrored by periodical patterns exhibited by the time series of day-ahead prices. From a methodological standpoint, we combine nonparametric filtering with monotone convex interpolation such that the resulting forward curve is pathwise smooth and monotonic, cross-sectionally stable, and time local. From an empirical standpoint, we exhibit these features in the context of EPEX Spot and EEX Derivative markets. We perform a backtesting analysis to assess the relative quality of our forward curve estimate compared to the benchmark market model of Benth, Koekebakker, and Ollmar (2007).

Publication Type: Article
Publisher Keywords: Energy Finance; Forward Pricing; Electricity Markets; Forward Curve Construction
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/17018
[img] Text - Accepted Version
This document is not freely accessible until 27 February 2019 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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