Electricity Derivatives Pricing with Forward-Looking Information
57 Pages Posted: 19 Feb 2013 Last revised: 29 Mar 2016
Date Written: April 1, 2015
In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We develop a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the importance of forward-looking information for electricity pricing.
Keywords: Electricity Futures, Fundamental Model, Derivatives Pricing, Forward-looking Information, Enlargement of Filtrations
JEL Classification: G12, G13, Q4, Q41
Suggested Citation: Suggested Citation