Jump Risk Premia in Short-Term Spread Options: Evidence from the German Electricity Market

34 Pages Posted: 17 Jul 2009

See all articles by Jan Marckhoff

Jan Marckhoff

University of Bamberg

Matthias Muck

University of Bamberg

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

Marckhoff, Jan and Muck, Matthias, Jump Risk Premia in Short-Term Spread Options: Evidence from the German Electricity Market (April 30, 2009). Available at SSRN: https://ssrn.com/abstract=1403817 or http://dx.doi.org/10.2139/ssrn.1403817

Jan Marckhoff (Contact Author)

University of Bamberg ( email )

Kirschaeckerstrasse 39
Bamberg, 96045
Germany

Matthias Muck

University of Bamberg ( email )

Kärntenstr. 7
Bamberg, 96052
Germany
+49-(0)951-860-2091 (Phone)

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