Pricing electricity day-ahead cap futures with multifactor skew-t densities

Short-term risk management is becoming increasingly significant in power trading as the intermittent renewable generators introduce more weather into price formation dynamics. There a vacuum hedging instruments at day-ahead stage to protect retailers particular from such volatility and spikes. Motivated by this requirement, paper analyses flexible product, cap futures. For pricing we parametrically predict probability distribution of prices using multifactor Generalized Additive Model for Location, Scale Shape (GAMLSS) based upon skew-t with forecasts calendar information explanatory variables. In particular, reveal that higher-order moment model superior several lower-order models normal all following three aspects: fairness method, underwriting risk-taker variance reduction effect hedger.