Cookies?
Library Header Image
LSE Research Online LSE Library Services

A structural risk-neutral model for pricing and hedging electricity derivatives

Aïd, René, Campi, Luciano and Langrené, Nicolas (2013) A structural risk-neutral model for pricing and hedging electricity derivatives. Mathematical Finance, 23 (3). pp. 387-438. ISSN 0960-1627

Full text not available from this repository.
Identification Number: 10.1111/j.1467-9965.2011.00507.x

Abstract

We develop a structural risk-neutral model for energy market modifying along several directions the approach introduced in Aïd et al. In particular, a scarcity function is introduced to allow important deviations of the spot price from the marginal fuel price, producing price spikes. We focus on pricing and hedging electricity derivatives. The hedging instruments are forward contracts on fuels and electricity. The presence of production capacities and electricity demand makes such a market incomplete. We follow a local risk minimization approach to price and hedge energy derivatives. Despite the richness of information included in the spot model, we obtain closed-form formulae for futures prices and semiexplicit formulae for spread options and European options on electricity forward contracts. An analysis of the electricity price risk premium is provided showing the contribution of demand and capacity to the futures prices. We show that when far from delivery, electricity futures behave like a basket of futures on fuels.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/journal/10.1111/(IS...
Additional Information: © 2012 John Wiley
Divisions: Statistics
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General
Sets: Departments > Statistics
Date Deposited: 13 May 2013 12:01
Last Modified: 20 Apr 2019 01:04
URI: http://eprints.lse.ac.uk/id/eprint/50233

Actions (login required)

View Item View Item