Understanding the Fine Structure of Electricity Prices
University of London, Birkbeck College - School of Economics, Mathematics and Statistics
ESSEC Business School
Journal of Business, Vol. 79, No. 3, 2006
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, C15Accepted Paper Series
Date posted: December 31, 2004
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