PORTFOLIO OPTIMIZATION IN ELECTRICITY TRADING WITH LIMITED LIQUIDITY

In principle, portfolio optimization in electricity markets can make use of the standard mean-variance model going back to Markowitz. Yet a key restriction in most electricity markets is the limited liquidity. Therefore the standard model has to be adapted to cope with limited liquidity. An application of this model shows that the optimal hedging strategy for generation portfolios is strongly dependent on the size of the portfolio considered as well as on the variance-covariancematrix used and the liquidity function assumed.