Modelling electricity forward curve dynamics in the Italian market

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Modelling electricity forward curve dynamics in the Italian market

Author Info

Silvana Musti ()
Viviana Fanelli ()

Abstract

In this paper we discuss the modelling of electricity contracts traded in the Italian market. We directly model the forward price of the electricity. We apply the Heath Jarrow Morton model in order to simulate the forward rate dynamics and evaluate first the forward price with instantaneous delivery time and then the "swap price" with delivery over a period. We use a regime-switching model to introduce jumps and spikes that depend on the state of the system. Thus the model describes the properties of the electricity price dynamics both in a base stable regime and in a spike regime. A numerical algorithm is developed to simulate swap price trajectories.

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Publisher Info
Paper provided by Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia in its series Quaderni DSEMS with number 20-2008.

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Length: 11 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:ufg:qdsems:20-2008

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This paper has been announced in the following NEP Reports:

NEP-ALL-2009-02-22 (All new papers)
NEP-ENE-2009-02-22 (Energy Economics)

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.:

Chiarella, Carl & Clewlow, Les & Musti, Silvana, 2005. "A volatility decomposition control variate technique for Monte Carlo simulations of Heath Jarrow Morton models," European Journal of Operational Research, Elsevier, vol. 161(2), pages 325-336, March. [Downloadable!] (restricted)
Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May. [Downloadable!]
Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September. [Downloadable!] (restricted)
Other versions:
- Huisman, R. & Mahieu, R.J., 2001. "Regime Jumps in Electricity Prices," Research Paper ERS-2001-48-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]

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