Modeling Spot Price Dependence in Australian Electricity Markets with Applications to Risk Management

35 Pages Posted: 25 Jan 2012 Last revised: 3 Oct 2017

See all articles by Katja Ignatieva

Katja Ignatieva

University of New South Wales (UNSW); University of New South Wales - Australian School of Business

Stefan Trück

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR); Macquarie University, Macquarie Business School

Date Written: August 14, 2015

Abstract

We examine the dependence structure of electricity spot prices across regional markets in Australia. One of the major objectives in establishing a national electricity market was to provide a nationally integrated and efficient electricity market, limiting market power of generators in the separate regional markets. Our analysis is based on a GARCH approach to model the marginal price series in the considered regions in combination with copulae to capture the dependence structure between the marginals. We apply different copula models including Archimedean, elliptical and copula mixture models. We find a positive dependence structure between the prices for all considered markets, while the strongest dependence is exhibited between markets that are connected via interconnector transmission lines. Regarding the nature of dependence, the Student-t copula provides a good fit to the data, while the overall best results are obtained using copula mixture models due to their ability to also capture asymmetric dependence in the tails of the distribution. Interestingly, our results also suggest that for the four major markets, NSW, QLD, SA and VIC, the degree of dependence has decreased starting from the year 2008 towards the end of the sample period in 2010. Examining the Value-at-Risk of stylized portfolios constructed from electricity spot contracts in different markets, we find that the Student-t and mixture copula models outperform the Gaussian copula in a backtesting study. Our results are important for risk management and hedging decisions of market participants, in particular for those operating in several regional markets simultaneously.

Keywords: Electricity Markets, Copula, Dependence Modeling, Risk Management

JEL Classification: C58, Q40, G32

Suggested Citation

Ignatieva, Katja and Ignatieva, Katja and Trueck, Stefan, Modeling Spot Price Dependence in Australian Electricity Markets with Applications to Risk Management (August 14, 2015). Available at SSRN: https://ssrn.com/abstract=1991452 or http://dx.doi.org/10.2139/ssrn.1991452

Katja Ignatieva

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/KatjaIgnatieva.aspx

University of New South Wales - Australian School of Business ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Stefan Trueck (Contact Author)

Macquarie University Sydney - Department of Applied Finance and Actuarial Studies ( email )

North Ryde
Sydney, New South Wales 2109
Australia
61298508483 (Phone)
61298508483 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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