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A single‐factor model analysis of the electricity futures price and its application
Author(s) -
Itoh Yasuyuki,
Kobayashi Takenori
Publication year - 2010
Publication title -
electrical engineering in japan
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.136
H-Index - 28
eISSN - 1520-6416
pISSN - 0424-7760
DOI - 10.1002/eej.20957
Subject(s) - futures contract , econometrics , autoregressive model , volatility (finance) , economics , electricity , autoregressive–moving average model , electricity price , spot contract , term (time) , mean reversion , autoregressive integrated moving average , financial economics , time series , mathematics , engineering , statistics , physics , quantum mechanics , electrical engineering
This paper presents a single‐factor model to describe the fluctuation of the electricity futures price for its trading risk management. An autoregressive moving‐average model [ARMA (2,1) process] was used to express the stochastic process of the price, instead of a conventionally used Markov process such as the AR(I) process, where the ARMA(2, 1) process becomes a hybrid of short‐ and long‐term mean‐reversion processes in the continuous time model. This model was applied to the analysis of the price of electricity futures (the PJM Monthly) traded on the New York Mercantile Exchange (NYMEX). The results showed that the model well explained the term structure of the volatility of futures price with respect to the time to maturity, which is important for estimating its trading risk. The expected long‐term fixed electricity price and its confidence interval were also estimated by using the obtained model function of the forward curve and its parameters. © 2010 Wiley Periodicals, Inc. Electr Eng Jpn, 172(4): 1–9, 2010; Published online in Wiley InterScience ( www.interscience.wiley.com ). DOI 10.1002/eej.20957