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Unifying the theory of storage and the risk premium by an unobservable intrinsic electricity price (2011.03987v1)
Published 8 Nov 2020 in q-fin.MF and math.PR
Abstract: In this paper we introduce a new concept for modelling electricity prices through the introduction of an unobservable intrinsic electricity price $p(\tau)$. We use it to connect the classical theory of storage with the concept of a risk premium. We derive prices for all common contracts such as the intraday spot price, the day-ahead spot price, and futures prices. Finally, we propose an explicit model from the class of structural models and conduct an empirical analysis, where we find an overall negative risk premium.