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Some Statistical Investigations on the Nature and Dynamics of Electricity Prices

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  • Giulio Bottazzi
  • Sandro Sapio
  • Angelo Secchi

Abstract

It is widely accepted that in liberalized electricity markets log-returns display fat-tailed densities. Besides qualitative assessments, so far precise characterizations of the shape of the distribution have been seldom provided. In this work, we characterize the conditional and unconditional probability density functions of daily electricity log-returns, and of the underlying shocks from the NordPool market, for each of the 24 hours, through a very flexible and general family of distributions, namely the Subbotin family. Our study contributes with novel results in the field. First, we show that price fluctuations in electricity markets are additive in nature. We do this by exploiting a scaling relationship between price level and volatility, which is in turn a new result in the electricity markets literature. Second, in line with recent studies, we uncover the existence of multiple regimes in price dynamics, and we characterize the distributional shape for each of them. Interestingly, the shocks behind electricity price dynamics are approximately Laplace if one conditions on low price levels, and closer to a Gaussian in correspondence of high initial price levels. These results are at variance with the evidence from financial markets. The peculiar non-storable nature of electricity, and the varying strength of correlations between bidding behaviors at different load levels are suggested as possible key factors behind the specificities of electricity markets outcomes.

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Bibliographic Info

Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2004/13.

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Date of creation: 01 Jul 2004
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Handle: RePEc:ssa:lemwps:2004/13

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Keywords: Electricity Markets; Subbotin Distribution; Laplace Distribution; Additive Process; Scaling;

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References

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  1. Haldrup, Niels & Nielsen, Morten Orregaard, 2006. "A regime switching long memory model for electricity prices," Journal of Econometrics, Elsevier, vol. 135(1-2), pages 349-376.
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  7. Alvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía.
  8. Joskow, Paul L, 1996. "Introducing Competition into Regulated Network Industries: From Hierarchies to Markets in Electricity," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 341-82.
  9. Bystrom, Hans N. E., 2005. "Extreme value theory and extremely large electricity price changes," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 41-55.
  10. Sandro Sapio, 2004. "Markets Design, Bidding Rules, and Long Memory in Electricity Prices," Revue d'Économie Industrielle, Programme National Persée, vol. 107(1), pages 151-170.
  11. Berkowitz, J. & Birgean, I. & Kilian, L., 1999. "On the Finite-Sample Accuracy of Nonparametric Resampling Algorithms for Economic Time Series," Papers 99-01, Michigan - Center for Research on Economic & Social Theory.
  12. Weron, R & Bierbrauer, M & Trück, S, 2004. "Modeling electricity prices: jump diffusion and regime switching," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(1), pages 39-48.
  13. Jeremy Berkowitz & Lutz Kilian, 2000. "Recent developments in bootstrapping time series," Econometric Reviews, Taylor & Francis Journals, vol. 19(1), pages 1-48.
  14. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
  15. Lucia, Julio J. & Schwartz, Eduardo, 2000. "Electricity prices and power derivatives: Evidence from the Nordic Power Exchange," University of California at Los Angeles, Anderson Graduate School of Management qt12w8v7jj, Anderson Graduate School of Management, UCLA.
  16. Youngki Lee & Luis A. N. Amaral & David Canning & Martin Meyer & H. Eugene Stanley, 1998. "Universal features in the growth dynamics of complex organizations," Papers cond-mat/9804100, arXiv.org.
  17. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
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Citations

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Cited by:
  1. Joachim Kaldasch, 2013. "Evolutionary Model of a Anonymous Consumer Durable Market," Papers 1306.3395, arXiv.org.
  2. Tomasz Kozubowski & Saralees Nadarajah, 2010. "Multitude of Laplace distributions," Statistical Papers, Springer, vol. 51(1), pages 127-148, January.
  3. Joachim Kaldasch, 2012. "Evolutionary Model of the Growth and Size of Firms," Papers 1208.1123, arXiv.org.
  4. Kaldasch, Joachim, 2011. "Evolutionary Model of Non-Durable Markets," EconStor Preprints 50531, ZBW - German National Library of Economics.
  5. Matteo Manera & Massimiliano Serati & Michele Plotegher, 2008. "Modeling Electricity Prices: From the State of the Art to a Draft of a New Proposal," Working Papers 2008.9, Fondazione Eni Enrico Mattei.
  6. Andrea Petrella & Sandro Sapio, 2010. "No PUN intended: A time series analysis of the Italian day-ahead electricity prices," RSCAS Working Papers 2010/03, European University Institute.
  7. Weron, Rafal, 2009. "Forecasting wholesale electricity prices: A review of time series models," MPRA Paper 21299, University Library of Munich, Germany.
  8. Joachim Kaldasch, 2012. "Evolutionäre Diffusion und der Produktlebenszyklus von Gebrauchsgütern," EconStor Preprints 59748, ZBW - German National Library of Economics.
  9. Weron, Rafal & Misiorek, Adam, 2007. "Heavy tails and electricity prices: Do time series models with non-Gaussian noise forecast better than their Gaussian counterparts?," MPRA Paper 2292, University Library of Munich, Germany, revised Oct 2007.
  10. 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.

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