Modelling Higher Moments of Electricity Prices

Abstract

It is crucial to model, quantify and understand the variables and dynamics that underlie the well-known extreme behaviour of spot electricity prices in wholesale markets. We explicitly model the conditional volatility and skewness of electricity prices. A GARCH-type model allowing for time-varying volatility and skewness, which is estimated assuming a Gram-Charlier expansion of the normal density function, is presented. This model is applied to data from Pennsylvania- New Jersey, NordPool and Victoria (Australia) markets. We document the existence of a rich structure in the conditional skewness of spot prices and we show the relationship between skewness and demand-supply related variables.

Keywords: Spot electricity prices, GARCH models, conditional volatility, conditional skewness, Gram-Charlier expansions

JEL Classification: G12, G13, C13, C14, Q4