Exploring Fundamental Modelling

Joaquin Narro and Monica Caamano

Fundamental analysis in energy markets investigates the economic interrelations between underlying fundamental variables and the expected future price of an energy commodity. Examples of these variables include supply and demand factors, ranging from weather to historical consumption levels, from renewables generation to transportation considerations, etc. The quantitative development of fundamental models makes extensive use of dependence and association analysis techniques, such as correlation or regression analysis. The systematisation of the resulting fundamental model involves the orderly monetisation of a fundamentally based, persisting trading inefficiency through trading rules.

The persistency of the trading inefficiency can be either forward- or backward-looking. Forward-looking inefficiencies are typically unravelled through framework analysis; while backward-looking inefficiencies require backtesting. In this chapter, we introduce dependence and association techniques within a backward-looking environment through an example involving coal and power. Similarly, we introduce a separate example of an equally backward-looking coal trading strategy based on renewables

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