Abstract
This paper demonstrates that electricity swap returns can be explained by a set of uncorrelated common and unique risk factors. Electricity swap returns differ from return data in other markets by a significant portion of overall risk being unaccounted for by common factors. It follows that hedging a given exposure with an exposure in another segment of the swap market could be fallible. Furthermore, the volatility function common to all swaps may have to be augmented by unique risk in applied pricing applications.
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