Spot and derivative pricing in the EEX power market

Michael Bierbrauer, Christian Menn, Svetlozar T. Rachev, Stefan Trück

Research output: Contribution to journalArticlepeer-review

103 Scopus citations

Abstract

Using spot and futures price data from the German EEX Power market, we test the adequacy of various one-factor and two-factor models for electricity spot prices. The models are compared along two different dimensions: (1) We assess their ability to explain the major data characteristics and (2) the forecasting accuracy for expected future spot prices is analyzed. We find that the regime-switching models clearly outperform its competitors in almost all respects. The best results are obtained using a two-regime model with a Gaussian distribution in the spike regime. Furthermore, for short and medium-term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot, a situation which is denoted as contango.

Original languageEnglish
Pages (from-to)3462-3485
Number of pages24
JournalJournal of Banking and Finance
Volume31
Issue number11
DOIs
StatePublished - Nov 2007

Keywords

  • Forward premium
  • Power markets
  • Regime-switching models
  • Spot price modeling

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