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Understanding the Fine Structure of Electricity PricesHélyette GemanUniversity of London, Birkbeck College - School of Economics, Mathematics and Statistics Andrea RoncoroniESSEC Business School Journal of Business, Vol. 79, No. 3, 2006 Abstract: This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a jump-reversion component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture - for the first time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.
Number of Pages in PDF File: 74 Keywords: Electricity prices, jump diffusions, statistical estimation, calibration, simulation, energy price risk JEL Classification: C51, C52, G12, Q40, C13, C15 Accepted Paper SeriesDate posted: December 31, 2004Suggested CitationContact Information
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