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Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market

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Author Info

  • Rafal Weron

    (Hugo Steinhaus Center)

  • Ingve Simonsen

    (The Norwegian University of Science and Technology)

  • Piotr Wilman

    (Wroclaw University of Technology)

Abstract

In this paper we address the issue of modeling spot electricity prices. After analyzing factors leading to the unobservable in other financial or commodity markets price dynamics we propose a mean reverting jump diffusion model. We fit the model to data from the Nord Pool power exchange and find that it nearly duplicates the spot price's main characteristics. The model can thus be used for risk management and pricing derivatives written on the spot electricity price.

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File URL: http://128.118.178.162/eps/em/papers/0303/0303007.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Econometrics with number 0303007.

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Length: 10 pages
Date of creation: 15 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpem:0303007

Note: Type of Document - PDF; prepared on IBM PC - PC-TEX; pages: 10 ; figures: 3 included. Appeared in "The Application of Econophysics", H. Takayasu (ed.), Springer, Tokyo, 2004, pp. 182-191.
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Web page: http://128.118.178.162

Related research

Keywords: electricity price; mean reversion; wavelet transform; jump diffusion model;

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References

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  1. Weron, R. & Kozłowska, B. & Nowicka-Zagrajek, J., 2001. "Modeling electricity loads in California: a continuous-time approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 344-350.
  2. Weron, Rafal & Przybyłowicz, Beata, 2000. "Hurst analysis of electricity price dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 283(3), pages 462-468.
  3. Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401.
  4. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
  5. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  6. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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Citations

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Cited by:
  1. Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics 0502005, EconWPA.
  2. Jakub Nowotarski & Jakub Tomczyk & Rafal Weron, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," HSC Research Reports HSC/12/06, Hugo Steinhaus Center, Wroclaw University of Technology.
  3. Hipòlit Torró & Julio Lucia, 2008. "Short-term electricity futures prices: Evidence on the time-varying risk premium," Working Papers. Serie EC 2008-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  4. Parail, V., 2010. "Properties of Electricity Prices and the Drivers of Interconnector Revenue," Cambridge Working Papers in Economics 1059, Faculty of Economics, University of Cambridge.
  5. Martin Rypdal & Ola L{\o}vsletten, 2012. "Modeling electricity spot prices using mean-reverting multifractal processes," Papers 1201.6137, arXiv.org.
  6. Rafal Weron, 2005. "Market price of risk implied by Asian-style electricity options," Econometrics 0502003, EconWPA.
  7. 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.
  8. Massimiliano Serati & Matteo Manera & Michele Plotegher, 2008. "Modelling electricity prices: from the state of the art to a draft of a new proposal," LIUC Papers in Economics 210, Cattaneo University (LIUC).
  9. Rafal Weron & Michael Bierbrauer & Stefan Trück, 2003. "Modeling electricity prices: jump diffusion and regime switching," HSC Research Reports HSC/03/01, Hugo Steinhaus Center, Wroclaw University of Technology.
  10. Simonsen, Ingve, 2005. "Volatility of power markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 10-20.
  11. Janczura, Joanna & Trueck, Stefan & Weron, Rafal & Wolff, Rodney, 2012. "Identifying spikes and seasonal components in electricity spot price data: A guide to robust modeling," MPRA Paper 39277, University Library of Munich, Germany.
  12. Josep Perello & Miquel Montero & Luigi Palatella & Ingve Simonsen & Jaume Masoliver, 2006. "Entropy of the Nordic electricity market: anomalous scaling, spikes, and mean-reversion," Papers physics/0609066, arXiv.org.
  13. Jan Seifert & Marliese Uhrig-Homburg, 2007. "Modelling jumps in electricity prices: theory and empirical evidence," Review of Derivatives Research, Springer, vol. 10(1), pages 59-85, January.
  14. repec:hal:journl:halshs-00259225 is not listed on IDEAS

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