Stochastic Models of Resonating Markets

Abstract

This paper describes a way to model a seasonally and irregularly peaking price dynamics, as that originated in commodity and energy markets, using a system of coupled nonlinear stochastic differential equations. The specific case of an electric power market is used to show which microeconomic features this approach is able to model. Critical point analysis is used in a simple way to show how the interaction between dynamic criticality and stochasticity can be used to develop further models, useful to explore more deeply other types of peaking price dynamics.

Keywords: Stochastic processes, Power markets, Seasonality, Mean-reversion

JEL Classification: C39, D49, G19, L11