Pricing Electricity Forwards Under Stochastic Volatility

29 Pages Posted: 19 Jul 2001

See all articles by B. Philipp Kellerhals

B. Philipp Kellerhals

University of Tuebingen - Department of Business Administration; Deutscher Investment-Trust

Date Written: May 2001

Abstract

Based on the peculiarities of electricity as underlying commodity of forward contracts we develop a time-continuous pricing model for short-term electricity forwards. The suggested stochastic volatility model utilizes the non-tradeable spot price of electricity and its variance rate as state variables. This enables us to capture the non-linearities, and the high and time varying volatility seen in electricity prices. Using maximum likelihood estimation based on Kalman filtering we report empirical results on electricity data from the Californian market.

Keywords: Electricity forwards, stochastic volatility, time-continuous model, equilibrium pricing, Kalman filtering.

JEL Classification: G13

Suggested Citation

Kellerhals, B. Philipp, Pricing Electricity Forwards Under Stochastic Volatility (May 2001). Available at SSRN: https://ssrn.com/abstract=274788 or http://dx.doi.org/10.2139/ssrn.274788

B. Philipp Kellerhals (Contact Author)

University of Tuebingen - Department of Business Administration ( email )

Mohlstrasse 36
Tuebingen, D-72074
Germany
+49-7071-2977088 (Phone)
+49-7071-550622 (Fax)

Deutscher Investment-Trust ( email )

Portfolio Management Quantitative Products
Mainzer Landstrasse 11-13
60329 Frankfurt am Main
Germany
+49 (0) 69 263 15359 (Phone)
+49 (0) 69 263 14947 (Fax)