The Nature of Power Spikes: A Regime-Switch Approach
34 Pages Posted: 21 Dec 2005
Date Written: October 14, 2005
Abstract
Due to its non-storable nature, electricity is a commodity with probably the most volatile spot prices, exemplified by occasional spikes. Appropriate pricing, portfolio, and risk management models have to incorporate these characteristics, and the spikes in particular. We investigate the nature of power spikes in a number of different markets. We test what time-series model is best able to capture the dynamics of these disruptive spot prices. We use regime-switching models to infer whether the price spikes should be treated as abnormal and independent deviations from the ‘normal’ price dynamics or whether they form an integral part of the price process. We test the time-series models on day-ahead markets in Europe and the US. We find that regimeswitch models are better able to capture the market dynamics than a GARCH(1,1) or Poisson jump model. We also find clear differences between the markets and attribute part of the differences to the share of hydro-power in the total supply stack: hydro-power serves as an indirect means to store electricity, which has a dampening effect on spikes.
Keywords: risk, volatility, spikes, power prices, regime-switches, spot markets
Suggested Citation: Suggested Citation
Register to save articles to
your library
Recommended Papers
-
Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets
-
Modelling Electricity Prices: International Evidence
By Alvaro Escribano, J. Ignacio Peña, ...
-
Modeling Electricity Prices: International Evidence
By Álvaro Escribano, Juan Ignacio Peña, ...
-
Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality
By Álvaro Cartea and Marcelo G. Figueroa
-
Understanding the Fine Structure of Electricity Prices
By Hélyette Geman and Andrea Roncoroni
-
The Price of Power - the Valuation of Power and Weather Derivatives
By Craig Pirrong and Martin Jermakyan
-
Trading Inefficiencies in California's Electricity Markets
By Severin Borenstein, James Bushnell, ...
-
By Álvaro Cartea and Pablo Villaplana
-
Pricing Power Derivatives: A Two-Factor Jump-Diffusion Approach
