Regime Jumps in Electricity Prices

20 Pages Posted: 4 Jun 2001  

Ronald Huisman

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Ronald Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group; TiasNimbas Business School

Date Written: August 2001

Abstract

Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.

Keywords: Electricity prices, mean-reversion, jump modelling, energy finance

Suggested Citation

Huisman, Ronald and Mahieu, Ronald, Regime Jumps in Electricity Prices (August 2001). ERIM Report Series Reference No. ERS-2001-48-F&A. Available at SSRN: https://ssrn.com/abstract=271910 or http://dx.doi.org/10.2139/ssrn.271910

Ronald Huisman (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Ronald J. Mahieu

Tilburg University - Center for Economic Research, Econometrics and Finance Group ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2430 (Phone)
+31 13 466 3280 (Fax)

HOME PAGE: http://center.uvt.nl/staff/mahieu/

TiasNimbas Business School ( email )

Warandelaan 2
Tilburg, North-Brabant 5071HS
Netherlands

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