Risk asymmetries in hydrothermal power generation markets

•A comprehensive empirical methodology to model electricity prices is proposed.•The asymmetries that characterize electricity prices are highlighted.•The effect of the asymmetries on VaR and CVaR measures are estimated.•Different tail behavior of positive and negative returns are documented.•Asymmet...

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Bibliographic Details
Published in:Electric power systems research 2017-06, Vol.147, p.154-164
Main Authors: Mosquera-López, Stephanía, Manotas-Duque, Diego Fernando, Uribe, Jorge Mario
Format: Article
Language:English
Subjects:
Asymmetry
Econometrics
Electricity consumption
Electricity distribution
Electricity prices
Electricity pricing
Extreme values
Hedging
Hydroelectric plants
Markets
Risk
Structural change
Studies
Tail risks
Volatility
Volatility regimes
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Summary:•A comprehensive empirical methodology to model electricity prices is proposed.•The asymmetries that characterize electricity prices are highlighted.•The effect of the asymmetries on VaR and CVaR measures are estimated.•Different tail behavior of positive and negative returns are documented.•Asymmetries in risk conditional on time at which a transaction occurs are found. Accurate decisions regarding exposure to and hedging against market risk, both of which are crucial for electricity producers and consumers, depend on a correct assessment of electricity price dynamics. This paper proposes a comprehensive empirical methodology to model price variations in electricity markets based on hydrothermal power generation. This proposal combines advances in time-series econometrics related to regime modeling, conditional heteroskedasticity, and extreme events. The study considers stylized facts of the series describing electricity prices, which are especially relevant for accurate risk pricing. More importantly, the proposed methodology enables the description and characterization of asymmetries at almost every level: intraday patterns, seasonal components, spikes, volatility regimes and extreme values; and the estimation of the effects of such asymmetries on traditional risk measures, such as VaR and CVaR. Different tail behaviors of positive and negative electricity returns are documented, which are relevant for assessing the risks of selling and buying strategies. In addition, asymmetries in risk that are conditional on the time at which the transaction occurs are found.
ISSN:0378-7796
1873-2046
DOI:10.1016/j.epsr.2017.02.032