Bayesian Calibration and Number of Jump Components in Electricity Spot Price Models

43 Pages Posted: 13 Jan 2016 Last revised: 6 May 2017

See all articles by Jhonny Gonzalez

Jhonny Gonzalez

University of Manchester - School of Mathematics

John Moriarty

Queen Mary University of London - School of Mathematical Sciences

Jan Palczewski

University of Leeds - School of Mathematics

Date Written: January 12, 2016

Abstract

We find empirical evidence that mean-reverting jump processes are not statistically adequate to model electricity spot price spikes but independent, signed sums of such processes are statistically adequate. Further we demonstrate a change in the composition of these sums after a major economic event. This is achieved by developing a Markov Chain Monte Carlo (MCMC) procedure for Bayesian model calibration and a Bayesian assessment of model adequacy (posterior predictive checking). In particular we determine the number of signed mean-reverting jump components required in the APXUK and EEX markets, in time periods both before and after the recent global financial crises. Statistically, consistent structural changes occur across both markets, with a reduction of the intensity and size, or the disappearance, of positive price spikes in the later period.

Keywords: Multifactor models, Bayesian calibration, Markov Chain Monte Carlo, Ornstein-Uhlenbeck process, Electricity spot price, Negative jumps

JEL Classification: C15, C11, Q40

Suggested Citation

Gonzalez, Jhonny and Moriarty, John and Palczewski, Jan, Bayesian Calibration and Number of Jump Components in Electricity Spot Price Models (January 12, 2016). Available at SSRN: https://ssrn.com/abstract=2714382 or http://dx.doi.org/10.2139/ssrn.2714382

Jhonny Gonzalez

University of Manchester - School of Mathematics ( email )

United Kingdom

John Moriarty

Queen Mary University of London - School of Mathematical Sciences ( email )

School of Mathematical Sciences
Mile End Road
London, E1 4NS
United Kingdom

Jan Palczewski (Contact Author)

University of Leeds - School of Mathematics ( email )

Leeds, LS2 9JT
United Kingdom

HOME PAGE: http://www.maths.leeds.ac.uk/~jp

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