Volatility and Liquidity on High-frequency Electricity Futures Markets: Empirical Analysis and Stochastic Modeling

34 Pages Posted: 17 Jun 2019 Last revised: 23 Feb 2020

See all articles by Marcel Kremer

Marcel Kremer

University of Duisburg-Essen

Fred Espen Benth

University of Oslo

Björn Felten

University of Duisburg-Essen

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science

Date Written: February 21, 2020

Abstract

This paper investigates the relationship between volatility and liquidity on the German electricity futures market based on high-frequency intraday prices. We estimate volatility by the time-weighted realized variance acknowledging that empirical intraday prices are not equally spaced in time. Empirical evidence suggests that volatility of electricity futures decreases as time approaches maturity, while coincidently liquidity increases. Established continuous-time stochastic models for electricity futures prices involve a growing volatility function in time and are thus not able to capture our empirical findings a priori. We demonstrate that incorporating increasing liquidity into the established models is key to model the decreasing volatility evolution.

Keywords: Volatility, Liquidity, Electricity futures, High-frequency prices, Stochastic modeling, Monte Carlo simulation, Time-weighted realized variance

JEL Classification: C13, C15, G10, G13, Q41

Suggested Citation

Kremer, Marcel and Benth, Fred Espen and Felten, Björn and Kiesel, Ruediger, Volatility and Liquidity on High-frequency Electricity Futures Markets: Empirical Analysis and Stochastic Modeling (February 21, 2020). Available at SSRN: https://ssrn.com/abstract=3400763 or http://dx.doi.org/10.2139/ssrn.3400763

Marcel Kremer (Contact Author)

University of Duisburg-Essen ( email )

Universitaetsstrasse 12
Essen, 45141
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/en/team/marcel-kremer/

Fred Espen Benth

University of Oslo ( email )

Center of Mathematics for Applications
Oslo, N-0317
Norway

Björn Felten

University of Duisburg-Essen ( email )

Universitätsstraße 2
Essen, 45141
Germany

HOME PAGE: http://www.ewl.wiwi.uni-due.de

Ruediger Kiesel

University of Duisburg-Essen - Faculty of Economic Science ( email )

Essen, 45117
Germany

HOME PAGE: http://www.lef.wiwi.uni-due.de/

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