RT Generic
T1 Pricing forward contracts in power markets by the certainty equivalence principle : explaining the sign of the market risk premium
A1 Benth, Fred Espen
A1 Cartea, Álvaro
A1 Kiesel, Rüdiger
AB 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 therisk preferences of market players and the interaction between buyers and sellers.In commodities markets this premium is an important indicator of the behavior ofbuyers and sellers and their views on the market spanning between short-term andlong-term horizons. We show that under certain assumptions it is possible to deriveexplicit solutions that link levels of risk aversion and market power with market pricesof risk and the market risk premium. We apply our model to the German electricitymarket and show that the market risk premium exhibits a term structure which canbe explained by the combination of two factors. Firstly, the levels of risk aversionof buyers and sellers, and secondly, how the market power of producers, relative tothat of buyers, affects forward prices with different delivery periods
YR 2007
FD 2007-12-14
LK https://hdl.handle.net/10016/12098
UL https://hdl.handle.net/10016/12098
LA eng
DS e-Archivo
RD 19 may. 2024