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Understanding the Fine Structure of Electricity Prices

74 Pages Posted: 31 Dec 2004  

Hélyette Geman

University of London - Economics, Mathematics and Statistics

Andrea Roncoroni

ESSEC Business School

Abstract

This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a jump-reversion component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture - for the first time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.

Keywords: Electricity prices, jump diffusions, statistical estimation, calibration, simulation, energy price risk

JEL Classification: C51, C52, G12, Q40, C13, C15

Suggested Citation

Geman, Hélyette and Roncoroni, Andrea, Understanding the Fine Structure of Electricity Prices. Journal of Business, Vol. 79, No. 3, 2006. Available at SSRN: https://ssrn.com/abstract=638322

Helyette Geman

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Andrea Roncoroni (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch BP 50105
Cergy-Pontoise, 95021
France
+33 (0)1 34 43 32 39 (Phone)
+33 (0)1 34 43 30 01 (Fax)

HOME PAGE: http://www45.essec.edu/faculty/andrea-roncoroni

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