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The stochastic behavior of electricity prices under scrutiny: Evidence from spot and futures markets

Author

Listed:
  • Bégin, Jean-François
  • Gómez, Fabio
  • Ignatieva, Katja
  • Li, Han

Abstract

This article proposes a stochastic volatility jump–diffusion model for pricing electricity derivative contracts. The main objective is to develop a model that effectively captures the characteristics and stylized facts of the electricity spot market, such as mean reversion, changing expectations in the spot price’s long-run level, seasonality, extreme volatility, price spikes, and time-varying jump intensity. We employ a particle filter that relies on both spot prices and futures data to estimate model parameters. The results demonstrate that incorporating the aforementioned features is crucial for accurately fitting both spot and futures prices, as evidenced by data from the Australian electricity market.

Suggested Citation

  • Bégin, Jean-François & Gómez, Fabio & Ignatieva, Katja & Li, Han, 2025. "The stochastic behavior of electricity prices under scrutiny: Evidence from spot and futures markets," Energy Economics, Elsevier, vol. 144(C).
    • Handle: RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325001197
    DOI: 10.1016/j.eneco.2025.108296
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    More about this item

    Keywords

    Electricity derivatives; Futures; Stochastic volatility; Jump–diffusion models; Affine models; Particle filtering;
    All these keywords.

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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