Pricing forward contracts in power markets by the certainty equivalence principle : explaining the sign of the market risk premium

Benth, Fred Espen; Cartea, Álvaro; Kiesel, Rüdiger

Publication:
Pricing forward contracts in power markets by the certainty equivalence principle : explaining the sign of the market risk premium

dc.affiliation.dpto	UC3M. Departamento de Economía de la Empresa	es
dc.contributor.author	Benth, Fred Espen
dc.contributor.author	Cartea, Álvaro
dc.contributor.author	Kiesel, Rüdiger
dc.date.accessioned	2011-09-15T17:37:27Z
dc.date.available	2011-09-15T17:37:27Z
dc.date.issued	2007-12-14
dc.description.abstract	In this paper we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players and the interaction between buyers and sellers. In commodities markets this premium is an important indicator of the behavior of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium. We apply our model to the German electricity market and show that the market risk premium exhibits a term structure which can be explained by the combination of two factors. Firstly, the levels of risk aversion of buyers and sellers, and secondly, how the market power of producers, relative to that of buyers, affects forward prices with different delivery periods
dc.format.mimetype	application/pdf
dc.identifier.uri	https://hdl.handle.net/10016/12098
dc.language.iso	eng
dc.relation.hasversion	http://hdl.handle.net/10016/12158
dc.rights	Atribución-NoComercial-SinDerivadas 3.0 España
dc.rights.accessRights	open access
dc.rights.uri	http://creativecommons.org/licenses/by-nc-nd/3.0/es/
dc.subject.eciencia	Empresa
dc.subject.other	Contango
dc.subject.other	Backwardation
dc.subject.other	Market price of risk
dc.subject.other	Electricity forwards
dc.subject.other	Market risk premium
dc.subject.other	Forward risk premium
dc.subject.other	Forward bias
dc.subject.other	Market power
dc.title	Pricing forward contracts in power markets by the certainty equivalence principle : explaining the sign of the market risk premium
dc.type	working paper	*
dc.type.hasVersion	SMUR	*
dspace.entity.type	Publication