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Electricity Price Modelling with a Regime Switching Volatility

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  • Silvana Musti

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  • Viviana Fanelli
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    Abstract

    We present a methodology to model electricity price dynamics by applying the interest rate theory toolkit. We construct the electricity market following [16] and applying the Heath, Jarrow and Morton ([7]) model. The electricity returns forward curve evolution using the Regime Switching Volatility is the instrument chosen to reflect into a simulating model the natural seasonality of electricity prices. The model calibration and the volatility parameters estimation allow to simulate in a realistic way the future electricity prices.

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    Bibliographic Info

    Paper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 06-2010.

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    Date of creation: Jun 2010
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    Handle: RePEc:ufg:qdsems:06-2010

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