Journal of Energy Markets

Risk.net

Introducing stylized facts on electricity futures through a market impact model

Jakob Krause

  • Quantity risk considerations are used to introduce stylized facts.
  • Electricity markets exhibit high frequency features on low frequencies.
  • Liquidation behavior leads to the stylized facts of electricity futures.

This paper provides an alternative way to introduce the stylized facts on electricity futures. For nonstorable commodities, forward-looking information is not necessarily incorporated in the price history. In contrast to contemporary electricity finance models, we introduce a mechanism based on the trading behavior of market participants and their corresponding market impact by exploiting characteristic initial positions and quantity risk considerations. For long times to maturity we end up with a market influenced by hedging pressure, whereas for short times to maturity quantity risk comes into play and yields an increased volatility. In addition, prices can also be negative. The model is accompanied by an empirical analysis showing that parameters that are typically only relevant on small timescales have a significant dynamic in daily returns over a period of years. This allows us to access the toolbox usually reserved for high-frequency modeling.

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