Journal
ENERGY ECONOMICS
Volume 113, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.eneco.2022.106221
Keywords
Electricity swaps; Delivery period; Market price of delivery risk; Seasonality; Samuelson effect; Stochastic volatility; Option pricing
Categories
Funding
- Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) [SFB 1283/2 2021 - 317210226]
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This paper introduces a market price for the delivery periods of electricity swaps in electricity markets and provides an arbitrage-free pricing framework for derivatives based on these contracts. The researchers use a weighted geometric averaging method to obtain the geometric swap price dynamics and consider typical features. The numerical study highlights the differences between different models depending on the delivery period.
In electricity markets, futures contracts typically function as a swap since they deliver the underlying over a period of time. In this paper, we introduce a market price for the delivery periods of electricity swaps, thereby opening an arbitrage-free pricing framework for derivatives based on these contracts. Furthermore, we use a weighted geometric averaging of an artificial geometric futures price over the corresponding delivery period. Without any need for approximations, this averaging results in geometric swap price dynamics. Our framework allows for including typical features as the Samuelson effect, seasonalities, and stochastic volatility. In particular, we investigate the pricing procedures for electricity swaps and options in line with Arismendi et al. (2016), Schneider and Tavin (2018), and Fanelli and Schmeck (2019). A numerical study highlights the differences between these models depending on the delivery period.
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