Journal of Energy Markets

Risk.net

A semiparametric factor model for electricity forward curve dynamics

Szymon Borak, Rafał Weron

ABSTRACT

In this paper, we introduce the dynamic semiparametric factor model (DSFM) for electricity forward curves. The biggest advantage of our approach is that it leads not only to smooth, seasonal forward curves extracted from exchange traded futures and forward electricity contracts, but also to a parsimonious factor representation of the curve. Using closing prices from the Nordic power market Nord Pool, we provide empirical evidence that the DSFM is an efficient tool for approximating forward curve dynamics.

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