Calibration of Multifactor Models in Electricity Markets

22 Pages Posted: 2 Nov 2004

See all articles by Martin T. Barlow

Martin T. Barlow

University of British Columbia (UBC) - Department of Mathematics

Yuri Gusev

IRMACS Centre, SFU

Manpo Lai

Algorithmics Inc.

Abstract

Spot prices of electricity and other energy commodities are often modeled by multifactor stochastic processes. This poses a problem of estimating models' parameters based on historical data, i.e. calibrating them to markets. Here we show how a traditional tool of Kalman Filters can be successfully applied to do this task. We study two mean-reverting log-spot price models and the Pilipovic model using correspondingly Kalman Filter and the extended Kalman Filter. The results of applying this method to market data from several power exchanges are discussed.

Keywords: Electricity markets, mean-reverting commodity prices, multifactor models, stochastic differential equations, Kalman Filters, calibration of market models

JEL Classification: C32, C52, Q40

Suggested Citation

Barlow, Martin T. and Gusev, Yuri and Lai, Manpo, Calibration of Multifactor Models in Electricity Markets. International Journal of Theoretical and Applied Finance, Vol. 7, No. 2, pp. 101-120, March 2004. Available at SSRN: https://ssrn.com/abstract=612041

Martin T. Barlow

University of British Columbia (UBC) - Department of Mathematics ( email )

1984 Mathematics Road
Vancouver, British Columbia V6T 1Z2
Canada
604-822-6377 (Phone)

Yuri Gusev (Contact Author)

IRMACS Centre, SFU ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Manpo Lai

Algorithmics Inc. ( email )

185 Spadina Avenue
Toronto M5T 2C6, Ontario
Canada

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