A seasonal copula mixture for hedging the clean spark spread with wind power futures

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Abstract

The recently introduced German wind power futures have brought the opportunity to address the problem
of volume risk in wind power generation directly. In this paper we study the hedging benefits of these
instruments in the context of gas-fired power plants by employing a strategy that allows trading in the
spot clean spark spread and wind power futures. To facilitate hedging decisions, we propose a time-varying
copula mixture for the joint behavior of the spot clean spark spread and the daily wind index. The model
describes the data surprisingly well, both in terms of the marginals and the dependence structure, while
being straightforward and easy to implement. Based on Monte Carlo simulations from the proposed model,
the results indicate that significant benefits can be achieved by using wind power futures to hedge the spot
clean spark spread. Moreover, a comparison study shows that accounting for asymmetry, tail dependence,
and time variation in the dependence structure is especially important in the context of risk management.
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Detaljer

The recently introduced German wind power futures have brought the opportunity to address the problem
of volume risk in wind power generation directly. In this paper we study the hedging benefits of these
instruments in the context of gas-fired power plants by employing a strategy that allows trading in the
spot clean spark spread and wind power futures. To facilitate hedging decisions, we propose a time-varying
copula mixture for the joint behavior of the spot clean spark spread and the daily wind index. The model
describes the data surprisingly well, both in terms of the marginals and the dependence structure, while
being straightforward and easy to implement. Based on Monte Carlo simulations from the proposed model,
the results indicate that significant benefits can be achieved by using wind power futures to hedge the spot
clean spark spread. Moreover, a comparison study shows that accounting for asymmetry, tail dependence,
and time variation in the dependence structure is especially important in the context of risk management.
OriginalsprogEngelsk
TidsskriftEnergy Economics
Volume/Bind78
TidsskriftsnummerFebruary 2019
Sider (fra-til)64-80
Antal sider17
ISSN0140-9883
DOI
StatusUdgivet - 1 feb. 2019
PublikationsartForskning
Peer reviewJa

    Forskningsområder

  • Clean spark spread; Wind power futures; Copula models; Time-varying dependence; Hedging.
ID: 261835776