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A branching process approach to power markets

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  • Jiao, Ying
  • Ma, Chunhua
  • Scotti, Simone
  • Sgarra, Carlo

Abstract

We propose and investigate a market model for power prices, including most basic features exhibited by previous models and taking into account self-exciting properties. The model proposed extends Hawkes-type models by introducing a twofold integral representation property. A Random Field approach was already exploited by Barndorff-Nielsen et al., who adopted the Ambit Field framework for describing the power price dynamics. The novelty contained in our approach consists of combining the basic features of both Branching Processes and Random Fields in order to get a realistic and parsimonious model setting. We shall provide some closed-form evaluation formulae for forward contracts. We discuss the risk premium behavior, by pointing out that in the present framework, a very realistic description arises. We outline a possible methodology for parameters estimation. We illustrate by graphical representation the main achievements of this approach.

Suggested Citation

  • Jiao, Ying & Ma, Chunhua & Scotti, Simone & Sgarra, Carlo, 2019. "A branching process approach to power markets," Energy Economics, Elsevier, vol. 79(C), pages 144-156.
    • Handle: RePEc:eee:eneeco:v:79:y:2019:i:c:p:144-156
    DOI: 10.1016/j.eneco.2018.03.002
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Deschatre, Thomas & Féron, Olivier & Gruet, Pierre, 2021. "A survey of electricity spot and futures price models for risk management applications," Energy Economics, Elsevier, vol. 102(C).
    2. Claudio Fontana & Alessandro Gnoatto & Guillaume Szulda, 2021. "CBI-time-changed L\'evy processes for multi-currency modeling," Papers 2112.02440, arXiv.org, revised Jul 2022.
    3. Frikha, Noufel & Li, Libo, 2021. "Well-posedness and approximation of some one-dimensional Lévy-driven non-linear SDEs," Stochastic Processes and their Applications, Elsevier, vol. 132(C), pages 76-107.
    4. Fontana, Claudio & Gnoatto, Alessandro & Szulda, Guillaume, 2023. "CBI-time-changed Lévy processes," Stochastic Processes and their Applications, Elsevier, vol. 163(C), pages 323-349.
    5. Claudio Fontana & Alessandro Gnoatto & Guillaume Szulda, 2022. "CBI-time-changed Lévy processes," Working Papers 05/2022, University of Verona, Department of Economics.

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    More about this item

    Keywords

    Branching Processes; Energy markets; Self-exciting structures; Risk premium term structure; Random Fields;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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