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Risk premia in electricity derivatives markets

Algieri, Bernardina, Leccadito, Arturo, Tunaru, Diana (2021) Risk premia in electricity derivatives markets. Energy Economics, 100 . Article Number 105300. ISSN 0140-9883. (doi:10.1016/j.eneco.2021.105300) (Access to this publication is currently restricted. You may be able to access a copy if URLs are provided) (KAR id:88751)

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https://doi.org/10.1016/j.eneco.2021.105300

Abstract

This study examines the prices of options contingent on electricity futures traded on the European Energy Exchange, with the aim to recover the probability density functions and risk premia. After we extract the risk neutral probability density functions from prices of such options, we transform the risk-neutral densities into real-world densities using both parametric and non-parametric statistical calibration methods and investigate the evolution of risk premia and pricing kernels. We find that both risk-neutral and real-world option-implied densities accurately forecast realized futures electricity prices. Positively skewed densities suggest that there is an inverse (or positive) leverage effect in the electricity market, meaning that a higher probability of large price increases in electricity has been incorporated in the traded option prices. In addition, we find that the state price densities are mostly increasing, implying that investors are more risk-averse to high electricity prices. Over a period of 15 years, our results provide evidence of negative market price of risk and risk premia in this new market.

Item Type: Article
DOI/Identification number: 10.1016/j.eneco.2021.105300
Uncontrolled keywords: Electricity derivatives, Heston model, Risk premia, Probability forecasting, Risk-neutral density
Subjects: H Social Sciences > HG Finance
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Diana Tunaru
Date Deposited: 18 Jun 2021 16:45 UTC
Last Modified: 03 Sep 2021 15:28 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/88751 (The current URI for this page, for reference purposes)
Tunaru, Diana: https://orcid.org/0000-0002-8351-4458
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