A critical empirical study of three electricity spot price models
We conduct an empirical analysis of three recently proposed and widely used models for electricity spot price process. The first model, called the jump-diffusion model, was proposed by Cartea and Figueroa (2005), and is a one-factor mean-reversion jump-diffusion model, adjusted to incorporate the most important characteristics of electricity prices. The second model, called the threshold model, was proposed by Roncoroni (2002) and further developed by Geman and Roncoroni (2006), and is an exponential Ornstein–Uhlenbeck process driven by a Brownian motion and a state-dependent compound Poisson process. It is designed to capture both statistical and pathwise properties of electricity spot prices. The third model, called the factor model, was proposed by Benth et al. (2007). It is an additive linear model, where the price dynamics is a superposition of Ornstein–Uhlenbeck processes driven by subordinators to ensure positivity of the prices. It separates the modelling of spikes and base components. We calibrate all three models to German spot price data. Besides employing techniques similar to those used in the original papers we adopt the prediction-based estimating function technique (Sørensen, 2000) and the filtering technique (Meyer-Brandis and Tankov, 2008). We critically compare the properties and the estimation of the three models and discuss several shortcomings and possible improvements. Besides analysing the spot price behaviour, we compute forward prices and risk premia for all three models for various German forward data and identify the key forward price drivers.
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- 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.
- Alvaro Cartea & Marcelo Figueroa, 2005.
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- Alvaro Cartea & Marcelo_Gustavo Figueroa, 2005. "Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality," Finance 0501011, EconWPA, revised 10 Sep 2005.
- Alvaro Cartea & Marcelo Gustavo Figueroa, 2005. "Pricing in Electricity Markets: a Mean Reverting Jump Diffusion Model with Seasonality," Birkbeck Working Papers in Economics and Finance 0507, Birkbeck, Department of Economics, Mathematics & Statistics.
- Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2001. "Non-Gaussian Ornstein-Uhlenbeck-based models and some of their uses in financial economics," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 63(2), pages 167-241.
- Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
- Helyette Geman & Stelios Kourouvakalis, 2008. "A Lattice-Based Method for Pricing Electricity Derivatives Under the Threshold Model," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(5-6), pages 531-567.
- Fred Espen Benth & Jan Kallsen & Thilo Meyer-Brandis, 2007. "A Non-Gaussian Ornstein-Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing," Applied Mathematical Finance, Taylor & Francis Journals, vol. 14(2), pages 153-169.
- Fred Espen Benth & Alvaro Cartea & Ruediger Kiesel, 2006.
"Pricing Forward Contracts in Power Markets by the Certainty Equivalence Principle: Explaining the Sign of the Market Risk Premium,"
Birkbeck Working Papers in Economics and Finance
0611, Birkbeck, Department of Economics, Mathematics & Statistics.
- Benth, Fred Espen & Cartea, Álvaro & Kiesel, Rüdiger, 2008. "Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2006-2021, October.
- Fred Espen Benth & Rodwell Kufakunesu, 2009. "Pricing Of Exotic Energy Derivatives Based On Arithmetic Spot Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 491-506.
- repec:dau:papers:123456789/1433 is not listed on IDEAS
- Michael Sørensen, 2000. "Prediction-based estimating functions," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 123-147.
- Thilo Meyer-Brandis & Peter Tankov, 2008. "Multi-Factor Jump-Diffusion Models Of Electricity Prices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(05), pages 503-528.
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