Volatility conventions in electricity markets

Angus Macleod and Elliot Tonkes

Abstract

The concept of volatility in the electricity markets is often discussed and analysed. This article presents a review on participants' interpretations of volatility in the market and illustrates the confusion that can arise from by quoting volatility from conventional calculations. The paper presents a set of proposed volatility metrics that will be useful as reference numbers in pricing derivatives in the market, quoting implied volatilities and to be utilised in market risk management.

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