Understanding the Fine Structure of Electricity Prices
AbstractThis paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, 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 the 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 InfoPaper provided by Université Paris-Dauphine in its series Open Access publications from Université Paris-Dauphine with number urn:hdl:123456789/1433.
Date of creation: Apr 2006
Date of revision:
Publication status: Published in Journal of Business (2006-04) v.79, p.1-74
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Energy price risk; Simulation; Calibration; Statistical estimations; Jump diffusions; Electricity prices;
Find related papers by JEL classification:
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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