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
Date Written: May 10, 2018
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
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