Correlation matrices estimation in energy portfolio optimization

With the development of electricity markets, the importance of risk management has been widely realized by market participants. Energy portfolio optimization, i.e., diversification of energy trading, is one of the important risk control approach for market participants to maximize their profits and keep the associated risk at an acceptable level. One of the key steps to the energy portfolio optimization is the estimation of correlation matrices. This paper proposed a single-factor model to estimate the correlation matrices which reduces the proceeding of data to a large extent compared to general statistical method. Based on the historical data of the PJM market, simulation results confirm the efficiency of the proposed model.