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- Risk Management in Cross-Border Electricity Markets in Europe - Analysis and Valuation of Derivative Instruments (2010)
- The thesis thoroughly discusses the valuation of derivatives in the European cross-border electricity market. It covers two distinct electricity markets in Europe and discusses the two most important types of derivatives within the European cross-border electricity market. Moreover, this thesis introduces the relevant risk factors associated with cross-border markets and estimates these risk-factors based on the major derivative instruments. Finally, it delivers a profound analysis of the valuation of these contracts. In the first part of the thesis, we analyze the ex-post risk premia of CfDs traded at Nord Pool. It is shown that CfDs contain significant risk premia that substantially vary in both sign and magnitude across market areas. We then investigate the development of these risk premia over time-to-maturity and identify their main economic drivers. Results show a strong coherency between ex-post risk premia and time-to-maturity. Although not significant for CfDs, this relation is highly significant for implied area and system forwards, the two constituents of CfDs. In addition, we identify a strong relationship between risk premia and the variance and skewness of the underlying spot prices and also find a significant impact of hydropower on spot prices and risk premia in the Nordic market. In the second part, this thesis discusses the valuation of hourly PTRs for the German-Dutch interconnector. We propose a spike-diffusion model and estimate its physical and risk-neutral parameters using the method of Markov Chain Monte Carlo (MCMC). Using those parameters, we compare the empirical and risk-neutral densities for the underlying price spreads. Our results show first of all that the spike-diffusion model adequately describes the underlying PTR prices especially during calm hours. Second, the estimated parameters show that during calm hours PTRs are traded at a discount, whereas market participants are willing to pay a premium for PTRs during turbulent hours. The premium implicit in those PTRs can be explained by either increased hedging demand or speculation of market participants. Furthermore, we find evidence for seasonality in the residuals of hourly and monthly PTR option prices. For monthly PTRs and hourly PTRs during turbulent hours, this seasonality is strongly related to jumps in the underlying spread. This result, in contrast to prior work, is the first based on not only spot but also option prices and offers further insights in the valuation of derivatives in cross-border as well as national electricity markets.