As market intermediaries, electricity retailers buy electricity from the wholesale market or self generate for re(sale) on the retail market. Electricity retailers are uncertain about how much electricity their residential customers will use at any time of the day until they actually turn switches on. While demand uncertainty is a common feature of all commodity markets, retailers generally rely on storage to manage demand uncertainty. On electricity markets, retailers are exposed to joint quantity and price risk on an hourly basis given the physical singularity of electricity as a commodity. In the literature on electricity markets, few articles deals on intra-day hedging portfolios to manage joint price and quantity risk whereas electricity markets are hourly markets. The contributions of the article are twofold. First, we define through a VaR and CVaR model optimal portfolios for specific hours (3am, 6am, . . . ,12pm) based on electricity market data from 2001 to 2011 for the French market. We prove that the optimal hedging strategy differs depending on the cluster hour. Secondly, we demonstrate the significantly superior efficiency of intra-day hedging portfolios over daily (therefore weekly and yearly) portfolios.
1clearly show that the losses of an optimal daily portfolio are at least nine times higher than the losses of optimal intra-day portfolios.
<p class="ESRBODY">This paper uses a regime-switching model that is built on mean-reverting and local volatility processes combined with two Markov regime-switching processes to understand the market structure of the French fuel retail market over the period 1990-2013. The volatility structure of these models depends on a first exogenous Markov chain, whereas the drift structure depends on a conditional Markov chain with respect to the first one. Our model allows us to identify mean reverting and switches in the volatility regimes of the margins. In the standard model of cartel coordination, volatility can increase competition. We find that cartelization is even stronger in phases of high volatility. Our best explanation is that consumers consider volatility in prices to be a change in market structure and are therefore less likely to search for lower-priced retailers, thus increasing the market power of the oligopoly. Our findings provide a better understanding of the behavior of oligopolies.</p>
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