Speculative trading of electricity contracts in interconnected locations
We derive an investor's optimal trading strategy of electricity contracts traded in two locations joined by an interconnector. The investor employs a price model which includes the impact of her own trades. The investor's trades have a permanent impact on prices because her trading activit...
| Autori principali: | , , |
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| Natura: | Journal article |
| Lingua: | English |
| Pubblicazione: |
Elsevier
2018
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| _version_ | 1826302824872411136 |
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| author | Cartea, A Jaimungal, S Qin, Z |
| author_facet | Cartea, A Jaimungal, S Qin, Z |
| author_sort | Cartea, A |
| collection | OXFORD |
| description | We derive an investor's optimal trading strategy of electricity contracts traded in two locations joined by an interconnector. The investor employs a price model which includes the impact of her own trades. The investor's trades have a permanent impact on prices because her trading activity affects the demand of contracts in both locations. Additionally, the investor receives prices which are worse than the quoted prices as a result of the elasticity of liquidity provision of contracts. Furthermore, the investor is ambiguity averse, so she acknowledges that her model of prices may be misspecified and considers other models when devising her trading strategy. We show that as the investor's degree of ambiguity aversion increases, her trading activity decreases in both locations, and thus her inventory exposure also decreases. Finally, we show that there is a range of ambiguity aversion parameters where the Sharpe ratio of the trading strategy increases when ambiguity aversion increases. |
| first_indexed | 2024-03-07T05:53:17Z |
| format | Journal article |
| id | oxford-uuid:e9a419af-8c27-4b5a-8da8-ff36a6aed3e7 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-03-07T05:53:17Z |
| publishDate | 2018 |
| publisher | Elsevier |
| record_format | dspace |
| spelling | oxford-uuid:e9a419af-8c27-4b5a-8da8-ff36a6aed3e72022-03-27T10:55:48ZSpeculative trading of electricity contracts in interconnected locationsJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:e9a419af-8c27-4b5a-8da8-ff36a6aed3e7EnglishSymplectic Elements at OxfordElsevier2018Cartea, AJaimungal, SQin, ZWe derive an investor's optimal trading strategy of electricity contracts traded in two locations joined by an interconnector. The investor employs a price model which includes the impact of her own trades. The investor's trades have a permanent impact on prices because her trading activity affects the demand of contracts in both locations. Additionally, the investor receives prices which are worse than the quoted prices as a result of the elasticity of liquidity provision of contracts. Furthermore, the investor is ambiguity averse, so she acknowledges that her model of prices may be misspecified and considers other models when devising her trading strategy. We show that as the investor's degree of ambiguity aversion increases, her trading activity decreases in both locations, and thus her inventory exposure also decreases. Finally, we show that there is a range of ambiguity aversion parameters where the Sharpe ratio of the trading strategy increases when ambiguity aversion increases. |
| spellingShingle | Cartea, A Jaimungal, S Qin, Z Speculative trading of electricity contracts in interconnected locations |
| title | Speculative trading of electricity contracts in interconnected locations |
| title_full | Speculative trading of electricity contracts in interconnected locations |
| title_fullStr | Speculative trading of electricity contracts in interconnected locations |
| title_full_unstemmed | Speculative trading of electricity contracts in interconnected locations |
| title_short | Speculative trading of electricity contracts in interconnected locations |
| title_sort | speculative trading of electricity contracts in interconnected locations |
| work_keys_str_mv | AT carteaa speculativetradingofelectricitycontractsininterconnectedlocations AT jaimungals speculativetradingofelectricitycontractsininterconnectedlocations AT qinz speculativetradingofelectricitycontractsininterconnectedlocations |