Jump Risk Premia in Short-Term Spread Options: Evidence from the German Electricity Market
34 Pages Posted: 17 Jul 2009
Date Written: April 30, 2009
Abstract
This paper analyzes the valuation of day-ahead Physical Transmission Rights (PTRs) on the German-Dutch interconnector. From a financial perspective, PTRs are options written on the difference between the German and Dutch hourly electricity prices. We propose a model for the valuation of day-ahead PTR options incorporating the unique characteristics of the underlying spread. We empirically test our model for all PTRs between 2001 and 2008, where we model each hour of the day separately. Overall, especially for calm hours, our approach constitutes an adequate model for the valuation of day-ahead PTR options. Empirical results show a negative or zero market price of jump risk for the turbulent hours 8 to 22. These results correspond to risk-loving or risk-neutral investors and indicate that market participants pay a premium for PTRs during peak hours. This premium is based either on increased hedging demand or on speculation.
Keywords: Electricity, Physical Transmission Right, Risk Premium, MCMC
JEL Classification: C13, G13, Q40
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Stochastic Behaviour of the Electricity Bid Stack: From Fundamental Drivers to Power Prices
By Sam Howison and Michael Coulon
-
How Much Should We Pay for Interconnecting Electricity Markets? A Real Options Approach
By Álvaro Cartea and Carlos G. Pedraz
-
The Valuation of Long-Term Exchange Options in the German Electricity Market
-
Forecasting Wholesale Electricity Prices: A Review of Time Series Models
By Rafal Weron
-
Tail Risk in Energy Portfolios
By Carlos G. Pedraz, Manuel Moreno, ...
-
Representing the Effects of Oligopolistic Competition on Risk-Neutral Prices in Power Markets
By Miguel Vazquez and Julián Barquín