Realized Volatility and Price Spikes in Electricity Markets: The Importance of Observation Frequency

Abstract

This paper uses high frequency wholesale electricity spot price data from Australia, Canada, and the United States to estimate realized volatility and the frequency of price spikes. I find similar levels of realized volatility in Australia and North America, with estimates ranging from 1,500% to 3,000%. I present evidence that nonparametric jump detection tests based the difference between realized variance and bipower variation are not reliable for electricity prices. Because daily electricity prices are average prices, fitting models to data sampled at the daily frequency can never lead to a "correct" specification for the underlying data generating mechanism.

Keywords: realized volatility, bipower variation, observation frequency, electricity markets, price spikes

JEL Classification: C14, Q40, L94, C52, G10