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A Class of Marked Point Processes for Modelling Electricity Prices

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    Abstract

    This paper presents a family of processes to model electricity spot prices in deregulated markets. Besides mean-reversion, a property they share with other comodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a « jump-reversion » component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture – for the first time to our knowledge – both the trajectorial and statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.

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    Bibliographic Info

    Paper provided by ESSEC Research Center, ESSEC Business School in its series ESSEC Working Papers with number DR 03004.

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    Length: 69 pages
    Date of creation: Mar 2003
    Date of revision:
    Handle: RePEc:ebg:essewp:dr-03004

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    Postal: ESSEC Research Center, BP 105, 95021 Cergy, France
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    Web page: http://www.essec.edu/
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    Related research

    Keywords: electricity prices; deregulated market; price risk; statistical models; US power markets;

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    1. Lo, Andrew W., 1988. "Maximum Likelihood Estimation of Generalized Itô Processes with Discretely Sampled Data," Econometric Theory, Cambridge University Press, vol. 4(02), pages 231-247, August.
    2. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers 1997-49, Carnegie Mellon University, Tepper School of Business.
    3. Torben G. Andersen & Luca Benzoni & Jesper Lund, 2001. "An Empirical Investigation of Continuous-Time Equity Return Models," NBER Working Papers 8510, National Bureau of Economic Research, Inc.
    4. Pindyck, Robert S., 1998. "The long-run evolution of energy prices," Working papers WP 4044-98., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
    6. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
    7. Ball, Clifford A. & Torous, Walter N., 1983. "A Simplified Jump Process for Common Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 18(01), pages 53-65, March.
    8. Litzenberger, Robert H & Rabinowitz, Nir, 1995. " Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 50(5), pages 1517-45, December.
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    Cited by:
    1. Rafal Weron, 2005. "Market price of risk implied by Asian-style electricity options," Econometrics 0502003, EconWPA.
    2. Falbo, Paolo & Fattore, Marco & Stefani, Silvana, 2010. "A new index for electricity spot markets," Energy Policy, Elsevier, vol. 38(6), pages 2739-2750, June.

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