Bayesian Calibration and Number of Jump Components in Electricity Spot Price Models
43 Pages Posted: 13 Jan 2016 Last revised: 6 May 2017
Date Written: January 12, 2016
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: Suggested Citation