Multi-Factor Jump-Diffusion Models of Electricity Prices
University of Oslo
Ecole Polytechnique, Paris
International Journal of Theoretical and Applied Finance, Vol. 11, No. 5, pp. 503-528, 2008
The recent deregulation of electricity markets has led to the creation of energy exchanges, where the electricity is freely traded. In this paper, we study the most salient statistical features of electricity prices with a particular attention to the European energy exchanges. These features can be adequately reproduced by the sum-OU model: a model representing the price as a sum of Lévy-driven Ornstein-Uhlenbeck (OU) processes. We present a new method for filtering out the different OU components and develop a statistical procedure for estimating the sum-OU model from data.
Keywords: Electricity prices, multi-factor models, Lévy-driven Ornstein-Uhlenbeck type processes, statistical estimation, nonlinear filteringAccepted Paper Series
Date posted: December 2, 2009
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