Residual Shape Risk on Natural Gas Market with Mixed Jump Diffusion

39 Pages Posted: 17 May 2019

See all articles by Karel Janda

Karel Janda

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Jakub Kourilek

Institute of Economic Studies, Faculty of Social Sciences, Charles University

Date Written: April 24, 2019

Abstract

This paper introduces residual shape risk as a new subclass of energy commodity risk. Residual shape risk is caused by insufficient liquidity of energy forward market when retail energy supplier has to hedge his short sales by a non-flexible standard baseload product available on wholesale market. Because of this inflexibility energy supplier is left with residual unhedged position which has to be closed at spot market. The residual shape risk is defined as a difference between spot and forward prices weighted by residual unhedged position which size depends on the shape of customers’ portfolio of a given retail energy supplier. We evaluated residual shape risk over the years 2014 - 2018 with a real portfolio of a leading natural gas retail supplier in the Czech Republic. The size of residual shape risk in our example corresponds approximately to 1 percent of profit margin of natural gas retail supplier.

Keywords: natural gas markets, spot prices, forward prices, residual shape risk

JEL Classification: C51, C58, Q41, Q47

Suggested Citation

Janda, Karel and Kourilek, Jakub, Residual Shape Risk on Natural Gas Market with Mixed Jump Diffusion (April 24, 2019). CAMA Working Paper No. 34/2019. Available at SSRN: https://ssrn.com/abstract=3389599 or http://dx.doi.org/10.2139/ssrn.3389599

Karel Janda (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
+422 240 05 223 (Phone)
+422 242 11 374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Jakub Kourilek

Institute of Economic Studies, Faculty of Social Sciences, Charles University ( email )

Celetná 13
Praha 1, 116 36
Czech Republic

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