A multi-factor polynomial framework for long-term electricity forwards with delivery period

We propose a multi-factor polynomial framework to model and hedge long-term electricity forwards with delivery period. In this framework the computation of forwards, their long maturity asymptotics, and cross-maturity... [ view full abstract ]

We propose a multi-factor polynomial framework to model and hedge long-term electricity forwards with delivery period. In this framework the computation of forwards, their long maturity asymptotics, and cross-maturity correlations are fully explicit, and the model calibration works easily and well. We investigate a rolling hedge that addresses the non-storability of electricity and poor liquidity in long-term markets, and is risk-minimizing in the sense of Föllmer and Schweizer. We calibrate the model to a selection of German power curves and investigate the quality of the hedge. This research is part of a collaboration with Axpo Trading.