Abstract
This paper examines the importance of the regular pattern in the behavior of electricity prices, and its implications for the purposes of derivative pricing. We analyze the Nordic Power Exchange's spot, futures, and forward prices. We conclude that the seasonal systematic pattern throughout the year, in particular, is of crucial importance in explaining the shape of the futures/forward curve. Moreover, in the context of the oneand two factor models analyzed in this paper, a simple sinusoidal functionis adequate in order capture the seasonal pattern of the features and forwardcurve directly implied by the seasonal behavior of spot electricity prices.
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Lucia, J.J., Schwartz, E.S. Electricity Prices and Power Derivatives: Evidence from the Nordic Power Exchange. Review of Derivatives Research 5, 5–50 (2002). https://doi.org/10.1023/A:1013846631785
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DOI: https://doi.org/10.1023/A:1013846631785