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A critical empirical study of three electricity spot price models

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  • Benth, Fred Espen
  • Kiesel, Rüdiger
  • Nazarova, Anna
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    Abstract

    We conduct an empirical analysis of three recently proposed and widely used models for electricity spot price process. The first model, called the jump-diffusion model, was proposed by Cartea and Figueroa (2005), and is a one-factor mean-reversion jump-diffusion model, adjusted to incorporate the most important characteristics of electricity prices. The second model, called the threshold model, was proposed by Roncoroni (2002) and further developed by Geman and Roncoroni (2006), and is an exponential Ornstein–Uhlenbeck process driven by a Brownian motion and a state-dependent compound Poisson process. It is designed to capture both statistical and pathwise properties of electricity spot prices. The third model, called the factor model, was proposed by Benth et al. (2007). It is an additive linear model, where the price dynamics is a superposition of Ornstein–Uhlenbeck processes driven by subordinators to ensure positivity of the prices. It separates the modelling of spikes and base components. We calibrate all three models to German spot price data. Besides employing techniques similar to those used in the original papers we adopt the prediction-based estimating function technique (Sørensen, 2000) and the filtering technique (Meyer-Brandis and Tankov, 2008). We critically compare the properties and the estimation of the three models and discuss several shortcomings and possible improvements. Besides analysing the spot price behaviour, we compute forward prices and risk premia for all three models for various German forward data and identify the key forward price drivers.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 5 ()
    Pages: 1589-1616

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    Handle: RePEc:eee:eneeco:v:34:y:2012:i:5:p:1589-1616

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Electricity spot price; Mean-reversion; Spikes; Jump-diffusion; Ornstein–Uhlenbeck process; Electricity forwards; Forward risk premium;

    References

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    1. Helyette Geman & Stelios Kourouvakalis, 2008. "A Lattice-Based Method for Pricing Electricity Derivatives Under the Threshold Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(5-6), pages 531-567.
    2. Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(4), pages 313-335.
    3. Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
    4. Benth, Fred Espen & Cartea, Álvaro & Kiesel, Rüdiger, 2008. "Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2006-2021, October.
    5. Thilo Meyer-Brandis & Peter Tankov, 2008. "Multi-Factor Jump-Diffusion Models Of Electricity Prices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(05), pages 503-528.
    6. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
    7. Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
    8. Geman, Hélyette & Roncoroni, Andréa, 2006. "Understanding the Fine Structure of Electricity Prices," Economics Papers from University Paris Dauphine 123456789/1433, Paris Dauphine University.
    9. Michael Sørensen, 2000. "Prediction-based estimating functions," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 123-147.
    10. H�lyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
    11. Fred Espen Benth & Rodwell Kufakunesu, 2009. "Pricing Of Exotic Energy Derivatives Based On Arithmetic Spot Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 491-506.
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    Citations

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    Cited by:
    1. Rainer Kleber & Karl Inderfurth & Peter Kelle, 2014. "Combined sourcing and inventory management using capacity reservation and spot market," FEMM Working Papers 140005, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    2. Jakub Nowotarski & Jakub Tomczyk & Rafal Weron, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," HSC Research Reports HSC/12/06, Hugo Steinhaus Center, Wroclaw University of Technology.
    3. Densing, M., 2013. "Dispatch planning using newsvendor dual problems and occupation times: Application to hydropower," European Journal of Operational Research, Elsevier, vol. 228(2), pages 321-330.
    4. Jakub Nowotarski & Jakub Tomczyk & Rafal Weron, 2013. "Modeling and forecasting of the long-term seasonal component of the EEX and Nord Pool spot prices," HSC Research Reports HSC/13/02, Hugo Steinhaus Center, Wroclaw University of Technology.
    5. Inderfurth, Karl & Kelle, Peter & Kleber, Rainer, 2013. "Dual sourcing using capacity reservation and spot market: Optimal procurement policy and heuristic parameter determination," European Journal of Operational Research, Elsevier, vol. 225(2), pages 298-309.

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