SHORT-TERM PRICE VOLATILITY IN COMMODITY MARKETS EXPLAINED - EVIDENCE FROM THE POWER SECTOR

23rd June 2016, 13:45 - 15:45

Quick Links:   Programme Overview  •  Parallel Session 2  •  Finance and Environment

Session: Finance and Environment
Chaired By: Kerry Krutilla, Indiana University
When & Where: 23rd June 2016, 13:45 - 15:45, Room F 26.3
Presented By: Andreas Knaut, Institute of Energy Economics at the University of Cologne
Co-Author(s): Martin Paschmann, Institute of Energy Economics at the University of Cologne
Discussant(s): Bernard Sinclair-Desgagné, HEC Montréal

The sources of risk and uncertainty in commodity markets are manifold. Commodity markets are organized in sequential order to allocate commodities efficiently. The respective prices in short-term commodity markets mostly reveal high price volatility. The main purpose of this paper is to analyze the fundamental causal relations in the interaction of sequential short-term commodity markets. We derive a theoretical model that is able to explain the high price volatility based on the example of the power sector. More precisely, the theoretical model maps the price formation in sequential short-term electricity markets and accounts for diminishing contract duration and sub-hourly changes in the demand and supply profiles of relevant market participants. The model is validated by an empirical analysis of historical price data for the intraday auction and continuous intraday trade in Germany. Evidence is given that the price volatility in electricity markets is especially driven by a shortage of supply in markets with sub-hourly contract duration.

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