Journal of Energy Markets

Optimal intraday power trading with a Gaussian additive process

Enrico Edoli, Marco Gallana and Tiziano Vargiolu

  • It is in principle possible to exploit the characteristics of intra-day power prices to define a fruitful trading strategy. 
  • By modeling intra-day prices as mean-reverting processes and maximizing a CRRA utility, we have an explicit optimal strategy, whose risky position increases as maturity approaches. 

Trading activity in intraday (ID) electricity markets has increased significantly over the last few years. We study the problem of a financial agent wishing to maximize a constant relative risk-aversion expected utility of their terminal wealth while operating in an ID market. Assuming that the price of traded hours follows an additive Ornstein– Uhlenbeck process, we derive the optimal strategy via the Hamilton–Jacobi–Bellman equation. The optimal portfolio in the log case is totally myopic with respect to time to maturity, while in the power case it becomes more and more risky as final maturity approaches. In order to implement our strategy, it is necessary to estimate the model parameters. One cannot resort to known results, as it is typical for time series to be unevenly time spaced, with more and more transactions as maturity approaches. Thus, we present an estimation procedure for unevenly spaced observations, based on maximum likelihood estimation and a bootstrap bias correction, in order to compensate for having few observations at the beginning of the observation frame. Finally, we backtest our method and conclude.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here