43 Pages Posted: 12 May 2016 Last revised: 12 Feb 2017
Date Written: April 15, 2016
We put forward a constructive definition of electricity forward price curve with cross-sectional timescale encompassing hourly frequency upward. The curve is jointly consistent to both risk-neutral market information, as represented by base load and peak load futures quotes, and historical market information, as mirrored by periodical patterns exhibited by time series of day-ahead prices. On a methodological ground, we combine non-parametric filtering with monotone convex interpolation in a way that the resulting forward curve is path wise smooth and monotonic, cross-sectionally stable, and time local. On an empirical ground, we exhibit these features in the joint context of EPEX Spot and EEX Derivative markets. A back testing analysis assesses the relative quality of our forward curve estimate compared to the benchmark market model of Benth et al. (2007).
Keywords: Energy Finance, Forward Pricing, Electricity Markets, Forward Curve Construction
JEL Classification: C31, E43, G13, Q02
Suggested Citation: Suggested Citation
Caldana, Ruggero and Fusai, Gianluca and Roncoroni, Andrea, Electricity Forward Curves with Thin Granularity (April 15, 2016). Available at SSRN: https://ssrn.com/abstract=2777990