A multi-factor polynomial framework for long-term electricity forwards with delivery period
Abstract
We propose a multi-factor polynomial framework to model and hedge long-term electricity contracts with delivery period. This framework has several advantages: the computation of forwards, risk premium and correlation between different forwards are fully explicit, and the model can be calibrated to observed electricity forward curves easily and well. Electricity markets suffer from non-storability and poor medium- to long-term liquidity. Therefore, we suggest a rolling hedge which only uses liquid forward contracts and is risk-minimizing in the sense of F\"ollmer and Schweizer. We calibrate the model to over eight years of German power calendar year forward curves and investigate the quality of the risk-minimizing hedge over various time horizons.
Keywords
Cite
@article{arxiv.1908.08954,
title = {A multi-factor polynomial framework for long-term electricity forwards with delivery period},
author = {Xi Kleisinger-Yu and Vlatka Komaric and Martin Larsson and Markus Regez},
journal= {arXiv preprint arXiv:1908.08954},
year = {2020}
}
Comments
Forthcoming in SIAM Journal on Financial Mathematics