Liquidity risks on power exchanges: a generalized Nash equilibrium model

The extreme volatility of electricity prices makes their financial derivatives important instruments for asset managers. Even if the volume of derivative contracts traded on Power Exchanges has been growing since the inception of the restructuring of the sector, electricity remains considerably less...

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Vydáno v:Mathematical programming Ročník 140; číslo 2; s. 381 - 414
Hlavní autoři: de Maere d’Aertrycke, Gauthier, Smeers, Yves
Médium: Journal Article
Jazyk:angličtina
Vydáno: Berlin/Heidelberg Springer Berlin Heidelberg 01.09.2013
Springer Nature B.V
Témata:
Arbitrage
Calculus of Variations and Optimal Control; Optimization
Combinatorics
Commodities
Derivatives
Electric power generation
Electricity
Energy industry
Equilibrium
Exchange
Full Length Paper
Futures
Game theory
Hedging
Liquidity
Liquids
Markets
Mathematical and Computational Physics
Mathematical Methods in Physics
Mathematical models
Mathematics
Mathematics and Statistics
Mathematics of Computing
Numerical Analysis
Prices
Risk
Theoretical
Valuation
Volatility
90C33 Complementarity problems
91B26 Market models (auctions, bargaining, bidding, selling
etc.
91B28 Finance, portfolios, investment
ISSN:0025-5610, 1436-4646
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Shrnutí:The extreme volatility of electricity prices makes their financial derivatives important instruments for asset managers. Even if the volume of derivative contracts traded on Power Exchanges has been growing since the inception of the restructuring of the sector, electricity remains considerably less liquid than other commodity markets. This paper assesses the effect of limited liquidity in power exchanges using an equilibrium model where agents cannot hedge up to their desired level. Mathematically, the problem is formulated as a two stage stochastic Generalized Nash Equilibrium with possibly multiple equilibria. Computing a large panel of solutions, we show how the risk premium and players profits are affected by illiquidity. We also show that the illiquidity in the FTR market affects the trades in the electricity futures market.
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ISSN:0025-5610
1436-4646
DOI:10.1007/s10107-013-0694-4