Extreme Value Theory for Heavy Tails in Electricity Prices

30 Pages Posted: 14 Jun 2016

See all articles by Florentina Paraschiv

Florentina Paraschiv

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School; University of St. Gallen, Institute for Operations Research and Computational Finance

Risto Hadzi-Mishev

University of St. Gallen

Dogan Keles

Karlsruhe Institute of Technology

Date Written: May 04, 2016

Abstract

Typical characteristics of electricity day-ahead prices at the European Power Exchange (EPEX) are very high volatility and a large number of extreme price changes. In this paper, we look at hourly spot prices at the German electricity market and apply extreme value theory (EVT) to investigate the tails of the price change distribution. Our results show the importance of delimiting price spikes and modelling them separately from the core of the price distribution. In particular, we get a realistic fit of the generalized Pareto distribution (GPD) to autoregressive–generalized autoregressive conditional heteroscedasticity (AR–GARCH) filtered price change series; based on this model, accurate forecasts of extreme price quantiles are obtained. Generally, our results suggest that EVT is of interest for both risk managers and portfolio managers in the highly volatile electricity market.

Keywords: extreme value theory (EVT), electricity price modeling, forecasting of price quantiles, value-at-risk (VaR), price spikes

Suggested Citation

Paraschiv, Florentina and Hadzi-Mishev, Risto and Keles, Dogan, Extreme Value Theory for Heavy Tails in Electricity Prices (May 04, 2016). Journal of Energy Markets, Vol. 9, No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2795006

Florentina Paraschiv (Contact Author)

Norwegian University of Science and Technology, Faculty of Economics and Management, NTNU Business School ( email )

Klæbuveien 72
Trondheim, NO-7030
Norway

University of St. Gallen, Institute for Operations Research and Computational Finance ( email )

Bodanstrasse 6
St. Gallen, 9000
Switzerland

Risto Hadzi-Mishev

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Dogan Keles

Karlsruhe Institute of Technology ( email )

Kaiserstraße 12
Karlsruhe, Baden Württemberg 76131
Germany

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