On the Seasonality in the Implied Volatility of Electricity Options

Viviana Fanelli & Maren Diane Schmeck (2019) On the seasonality in the implied volatility of electricity options, Quantitative Finance, DOI: 10.1080/14697688.2019.1582792

28 Pages Posted: 23 May 2018 Last revised: 8 Apr 2019

See all articles by Viviana Fanelli

Viviana Fanelli

University of Bari

Maren Diane Schmeck

Bielefeld University - Center for Mathematical Economics

Date Written: May 10, 2018

Abstract

Seasonality is an important topic in electricity markets, as both supply and demand are dependent on the time of the year. Clearly the level of prices shows a seasonal behaviour, but not only. Also the price fluctuations are typically seasonal. In this paper, we study empirically the implied volatility of options on electricity futures, investigate whether seasonality is present and we aim to quantify its structure. Although typically futures prices can be described well with multi-factor models including exponentially decreasing components, we do not find evidence of exponential behaviour in our data set. Generally, a simple linear shape reflects the squared volatilities very well as a curve depending on the time to maturity. Moreover, we find clear seasonal patterns in the level of the volatility depending on the delivery month of the futures, and compare the performance of several implementations of seasonality in the one factor framework.

Keywords: Implied Volatility, Electricity Options, Seasonality, Factor Models, Settlement Prices

Suggested Citation

Fanelli, Viviana and Schmeck, Maren Diane, On the Seasonality in the Implied Volatility of Electricity Options (May 10, 2018). Viviana Fanelli & Maren Diane Schmeck (2019) On the seasonality in the implied volatility of electricity options, Quantitative Finance, DOI: 10.1080/14697688.2019.1582792 . Available at SSRN: https://ssrn.com/abstract=3176590 or http://dx.doi.org/10.2139/ssrn.3176590

Viviana Fanelli (Contact Author)

University of Bari ( email )

Piazza Umberto I
Bari, 70028
Italy

Maren Diane Schmeck

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

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