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Discussion Series
Frankfurt MathFinance Colloquium
Professor Dr. Rüdiger Kiesel
Institute for Mathematical Finance, Ulm University
Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: explaining the sign of the market risk premium
Abstract
In this talk we provide a framework that explains how the market risk premium, defined as the difference between forward prices and spot forecasts, depends on the risk preferences of market players. In commodities markets this premium is an important indicator of the behaviour of buyers and sellers and their views on the market spanning between short-term and long-term horizons. We show that under certain assumptions it is possible to derive explicit solutions that link levels of risk aversion and market power with market prices of risk and the market risk premium.Based on joint work with Alvaro Cartea (Birkbeck College, University of London, UK) and Fred Espen Benth (University of Oslo, Norway)
Wednesday June 24 2009 5:00-7:00 p.m., Frankfurt School of Finance & Management. Room TBA.
