Modeling electricity spot prices - Combining mean-reversion, spikes and stochastic volatility
Starting with the liberalization of electricity trading, this market grew rapidly over the last decade. However, while spot and future markets are rather liquid nowadays, option trading is still limited. One of the potential reasons for this is that the spot price process of electricity is still puzzling researchers and practitioners. In this paper, we propose an approach to model spot prices that combines mean-reversion, spikes and stochastic volatility. Thereby we use different mean-reversion rates for 'normal' and 'extreme' (spike) periods. Another feature of the model is its ability to capture correlation structures of electricity price spikes. Furthermore, all model parameters can easily be estimated with help of historical data. Consequently, we argue that this model does not only extend academic literature on electricity spot price modeling, but is also suitable for practical purposes, e.g. as underlying price model for option pricing.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Arcisstr. 21, 80333 München|
Fax: 089 289 25070
Web page: http://www.cefs.de/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Redl, Christian & Haas, Reinhard & Huber, Claus & Böhm, Bernhard, 2009. "Price formation in electricity forward markets and the relevance of systematic forecast errors," Energy Economics, Elsevier, vol. 31(3), pages 356-364, May.
- Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
When requesting a correction, please mention this item's handle: RePEc:zbw:cefswp:201102. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.