A Space-Time Random Field Model for Electricity Forward Prices

41 Pages Posted: 24 May 2016 Last revised: 23 Nov 2016

See all articles by Fred Espen Benth

Fred Espen Benth

University of Oslo - Department of Mathematics

Florentina Paraschiv

Zeppelin University, Chair of Finance; Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School; University of St. Gallen, Institute for Operations Research and Computational Finance

Date Written: May 23, 2016

Abstract

Structural models for forward electricity prices are of great relevance nowadays, given the major structural changes in the market due to the increase of renewable energy in the production mix. In this study, we derive a spatio-temporal dynamical model based on the Heath-Jarrow-Morton (HJM) approach under the Musiela parametrization, which ensures an arbitrage-free model for electricity forward prices. The model is fitted to a unique data set of historical price forward curves. As a particular feature of the model, we disentangle the temporal from spatial (maturity) effects on the dynamics of forward prices, and shed light on the statistical properties of risk premia, of the noise volatility term structure and of the spatio-temporal noise correlation structures. We find that the short-term risk premia oscillates around zero, but becomes negative in the long run. We identify the Samuelson effect in the volatility term structure and volatility bumps, explained by market fundamentals. Furthermore we find evidence for coloured noise and correlated residuals, which we model by a Hilbert space-valued normal inverse Gaussian Lévy process with a suitable covariance functional.

Keywords: spatio-temporal models, price forward curves, term structure volatility, risk premia, electricity markets

JEL Classification: C02, C13, C23

Suggested Citation

Benth, Fred Espen and Paraschiv, Florentina, A Space-Time Random Field Model for Electricity Forward Prices (May 23, 2016). University of St.Gallen, School of Finance Research Paper No. 2016/11, Available at SSRN: https://ssrn.com/abstract=2783296 or http://dx.doi.org/10.2139/ssrn.2783296

Fred Espen Benth

University of Oslo - Department of Mathematics

Blindern, N-0162, Os
Norway

Florentina Paraschiv (Contact Author)

Zeppelin University, Chair of Finance ( email )

Am Seemooser Horn 20
Friedrichshafen, 88045
Germany

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School ( email )

Klæbuveien 72
Trondheim, NO-7030
Norway

University of St. Gallen, Institute for Operations Research and Computational Finance ( email )

Bodanstrasse 6
St. Gallen, 9000
Switzerland

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