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Modelling Electricity Swaps with Stochastic Forward Premium Models

Iván Blanco, Juan Ignacio Peña, and Rosa Rodriguez

Year: 2018
Volume: Volume 39
Number: Number 2
DOI: 10.5547/01956574.39.2.ibla
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Abstract:
We present a new model for pricing electricity swaps. Two general factors affect contracts but unique risk elements affect each contract. General factors are average swap prices and deterministic trend-seasonal components, and unique elements are forward premiums. Innovations follow MNIG distributions. We estimate the model with data from the European Energy Exchange. The model outperforms four competitors, both in in-sample valuation and in out-of-sample forecasting, and in fitting the term structure of volatilities by market segments. Competitor models are (i) diffusion spot prices, (ii) jump-diffusion spot prices with time dependent volatility, (iii) HJM-based and (iv) Levy multifactor model with NIG distributions. Value-at-Risk measures based on normality strongly underestimate tail risk but our model gives estimates that are more exact.



Market Makers and Liquidity Premium in Electricity Futures Markets

Juan Ignacio Peña and Rosa Rodríguez

Year: 2022
Volume: Volume 43
Number: Number 2
DOI: 10.5547/01956574.43.2.jpen
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Abstract:
This paper studies the forward premium as a liquidity premium in electricity futures markets as determined by producers and retailers' demand for immediacy. Demand for immediacy by a buyer (seller) means the willingness to buy (sell) at the current market price rather than wait until a better price appears. An imbalance between the supply and demand of futures contracts creates a demand for immediacy. Market makers satisfy this demand by offsetting the imbalance at the current market price and require a liquidity premium until the imbalance disappears. The liquidity premium is negative (positive) when market makers sell (buy) futures contracts. The empirical application to the French, German, Spanish, and Nordic futures electricity markets in 2008–2017, finds several periods with a negative liquidity premium in the first three markets, suggesting that retailers wanted to offload a higher amount of price risk than the producers. The premium decreases when the number of market makers increases.





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