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Published in:
2016 | OriginalPaper | Chapter
Data Analysis and Statistical Issues
Author : Daniel Mahoney
Published in: Modeling and Valuation of Energy Structures
Publisher: Palgrave Macmillan UK
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Let us start with an example that is very simple, yet illustrates well both the kind of econometric problems faced in energy markets as well as the essential features the econometric analysis must address. Invariably, we are not interested in estimation as such, but only within the context of valuing some structured product/deal. Suppose we are to bid on a deal that entails taking exposure to some (non-traded) entity y, which we believe (for whatever reason) to stand in a relation to some (forward traded) entity x. We thus anticipate putting on some kind of hedge with this entity x. A critical aspect of this deal is that the exposure is realized at a specific time in the future, denoted by T. Examples of proxy hedging include: Hedging short-term exposure at a physical node in PJM with PJM-WHedging very long-term PJM-W exposure with Henry Hub natural gasHedging illiquid Iroquois gas basis with more liquid Algonquin basis.