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Heavy tails and electricity prices

  • Rafal Weron

In the first years after the emergence of deregulated power markets it became apparent that for the valuation of electricity derivatives we cannot simply rely on models developed for financial or other commodity markets. However, before adequate models can be put forward the unique characteristics of electricity (spot) prices have to be thoroughly analyzed. In particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of returns. In this paper we first analyze the stylized facts of electricity prices, then present two modeling approaches: jump-diffusion and regime-switching, which to some extent address the pertinent issues.

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File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_05_02.pdf
File Function: Original version, 2005
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Paper provided by Hugo Steinhaus Center, Wroclaw University of Technology in its series HSC Research Reports with number HSC/05/02.

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Length: 30 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:wuu:wpaper:hsc0502
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  1. Anna Chernobai & Krzysztof Burnecki & Svetlozar Rachev & Stefan Trueck & Rafal Weron, 2005. "Modeling catastrophe claims with left-truncated severity distributions (extended version)," HSC Research Reports HSC/05/01, Hugo Steinhaus Center, Wroclaw University of Technology.
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