Modelling Jumps in Electricity Prices: Theory and Empirical Evidence
38 Pages Posted: 23 May 2006
Date Written: October 31, 2006
Objective of this paper is to gain insights into jump occurrences and to enhance the understanding of modelling jumps in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the effectiveness of different jump specifications. To this end, we calibrate the models to daily EEX market data through Markov Chain Monte Carlo based methods. To assess the quality of the estimated jump processes, we analyse their trajectorial and statistical properties and compare them to market data. Moreover, we discuss the associated model risk when calibrating the models to the forward curve and using the approaches for derivatives pricing.
Keywords: electricity prices, jump diffusion, derivatives pricing
JEL Classification: C11, G12, G13, Q4
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