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Extreme Value Theory and Extremely Large Electricity Price Changes

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Author Info
Byström, Hans () (Department of Economics, Lund University)

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Abstract

Nord Pool, the first multinational exchange for electricity trading, has existed since January 1996. Typical characteristics of electricity prices on Nord Pool are a very high volatility and a large number of very large, or extreme, price changes. In this paper we look at hourly spot prices on NordPool and apply extreme value theory to investigate the tails of the price change distribution. We find a good fit of both the generalized extreme value distribution and the generalized Pareto distribution to AR-GARCH filtered price change series, and accurate estimates as well as forecasts of extreme quantiles are produced. Generally, our results suggest extreme value theory to be of interest to both risk managers and portfolio managers in the highly volatile electricity market.

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Publisher Info
Paper provided by Lund University, Department of Economics in its series Working Papers with number 2001:19.

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Length: 22 pages
Date of creation: 15 Oct 2001
Date of revision:
Publication status: Published in International Review of Economics and Finance, 2005, pages 41-55.
Handle: RePEc:hhs:lunewp:2001_019

Contact details of provider:
Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
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Related research
Keywords: electricity prices; conditional extreme value theory; GARCH; tail quantiles;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G19 - Financial Economics - - General Financial Markets - - - Other
Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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References listed on IDEAS
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.:
  1. Jon Danielsson, 2000. "The Emperor has no Clothes: Limits to Risk Modelling," FMG Special Papers sp126, Financial Markets Group. [Downloadable!] (restricted)
    Other versions:
  2. Evis Këllezi & Manfred Gilli, 2000. "Extreme Value Theory for Tail-Related Risk Measures," FAME Research Paper Series rp18, International Center for Financial Asset Management and Engineering. [Downloadable!]
  3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April. [Downloadable!] (restricted)
  4. McNeil, Alexander J. & Frey, Rudiger, 2000. "Estimation of tail-related risk measures for heteroscedastic financial time series: an extreme value approach," Journal of Empirical Finance, Elsevier, vol. 7(3-4), pages 271-300, November. [Downloadable!] (restricted)
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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.)

  1. Sandro Sapio, 2004. "Market Design, Bidding Rules, and Long Memory in Electricity Prices," LEM Papers Series 2004/07, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  2. Marius Ooms & M. Angeles Carnero & Siem Jan Koopman, 2004. "Periodic Heteroskedastic RegARFIMA models for daily electricity spot prices," Econometric Society 2004 Australasian Meetings 158, Econometric Society. [Downloadable!]
    Other versions:
  3. Sandro Sapio, 2006. "An Empirically Based Model of the Supply Schedule in Day-Ahead Electricity Markets," LEM Papers Series 2006/12, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  4. Giulio Bottazzi & Sandro Sapio & Angelo Secchi, 2004. "Some Statistical Investigations on the Nature and Dynamics of Electricity Prices," LEM Papers Series 2004/13, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy. [Downloadable!]
  5. Eduardo Martínez Chombo, 2005. "Decomposing electricity prices with jumps," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 20(1), pages 27-52. [Downloadable!]
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