Scandinavian Working Papers in Economics
Knut Wicksell Working Paper Series,
Lund University, Knut Wicksell Centre for Financial Studies
No 2015/1: A Power Market Forward Curve with Hydrology Dependence An Approach based on Artificial Neural Networks
Rikard Green ()
Additional contact information
Rikard Green: Knut Wicksell Centre for Financial Studies, Lund University, Postal: Knut Wicksell Centre for Financial Studies , Lund University School of Economics and Management, P.O. Box 7080 , S-220 07 Lund, Sweden
Abstract: This paper develops an hourly forward curve for power markets where the intra-day and intra-week shapes (profiles) depend on the level of the hydrological balance. The shaping model is based on a feed-forward Artificial Neural Network (ANN), which is trained on a historical data set of hourly electricity spot prices from the Nord Pool market and weekly measurements of the Nordic hydrological balance. The yearly seasonal cycle is estimated with historical electricity forward prices from the Nasdaq OMX Commodities exchange. We calibrate the shaping model to prevailing electricity forward prices and proceed to demonstrate its most important properties. By using comparative static analysis we particulary focus on the hydro dependence of the shapes. We conclude the paper with a real world valuation task. By combining our proposed forward curve with a simple Ornstein-Uhlenbeck process we price a strip of hourly call options on the electricity spot price under different hydrological scenarios.
Keywords: Power markets; forward curve; seasonality; artificial neural networks
32 pages, January 26, 2015
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kwc-2015-1.pdf
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