A new model for electricity price series modelling and forward and volatility curves computation

Abstract

As a result of the deregulation processes, liberalized markets, where electricity futures and derivatives are traded, have arisen all over the world. Utilities, consumers, traders and, generally, market agents must do quantitative assessments of their positions. Basic analytical data are the forward and volatility curves of the traded products. Ideally, these curves should be derived from publicly available traded prices. However, as electricity derivative markets are usually rather thin, alternative procedures based on spot prices and theoretical computations must be used instead. In this paper, a new spot price evolution model is proposed and the resulting theoretical forward and volatility curves derived.

As a result of the deregulation processes, liberalized markets, where electricity futures and derivatives are traded, have arisen all over the world. Utilities, consumers, traders and, generally, market agents must do quantitative assessments of their positions. Basic analytical data are the forward and volatility curves of the traded products. Ideally, these curves should be derived from publicly available traded prices. However, as electricity derivative markets are usually rather thin, alternative procedures based on spot prices and theoretical computations must be used instead. In this paper, a new spot price evolution model is proposed and the resulting theoretical forward and volatility curves derived.