Optimal Liquidation of Electricity Futures Portfolios: An Anticipative Market Impact Model

Abstract

Electricity markets commonly exhibit an oligopolistic structure with market participants whose individual trading activities may shift prices essentially. In this context, the question of how to optimally liquidate an existing electricity futures portfolio over a fixed time horizon under the constraint of minimizing unfavorable price impact effects is of striking relevance for energy risk management. In this article, we thus invent a tractable market impact model for electricity futures prices. More precisely, we derive optimal liquidation strategies with respect to different target functionals of ‘conditional expected trading cost’ type. Moreover, we take forward-looking information about future electricity price behavior into account by exploiting enlarged filtration methods. Finally, we derive optimal liquidation strategies for electricity futures portfolios under this insider trading machinery as well.