There is a growing need to model the dynamics of electricity spot prices. While many studies have adopted the jump-diffusion model used successfully in traditional financial markets, the distinctive features of energy prices present non-trivial challenges. In particular, electricity price series feature extreme jumps of magnitudes rarely seen in financial markets, and occurring at greater frequency. Standard parametric approaches to estimating jump-diffusion models struggle to disentangle the jump and non-jump variation. This paper explores a recently-developed approach to separating the total variation into jump and non-jump components. Using quadratic variation theory, we non-parametrically estimate jump parameters for five power markets which are known to feature some important physical differences. The unique characteristics of the jump and non-jump components of the total variation are studied for each market. Given the evidence that the two sources of variation in spot prices have distinct dynamics, the paper explores whether volatility forecasts can be improved by explicitly incorporating the jump and non-jump components of the total variation.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)