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

  • Rafal Weron

    (Hugo Steinhaus Center)

  • Ingve Simonsen

    (The Norwegian University of Science and Technology)

  • Piotr Wilman

    (Wroclaw University of Technology)

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://econwpa.repec.org/eps/em/papers/0303/0303007.pdf
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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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  1. 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.
  2. 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.
  3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  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. 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.
  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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