Modelling Jumps in Electricity Prices: Theory and Empirical Evidence

38 Pages Posted: 23 May 2006

See all articles by Jan Seifert

Jan Seifert

University of Karlsruhe (TH)

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Date Written: October 31, 2006

Abstract

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

Suggested Citation

Seifert, Jan and Uhrig-Homburg, Marliese, Modelling Jumps in Electricity Prices: Theory and Empirical Evidence (October 31, 2006). Available at SSRN: https://ssrn.com/abstract=903804 or http://dx.doi.org/10.2139/ssrn.903804

Jan Seifert (Contact Author)

University of Karlsruhe (TH) ( email )

Financial Engineering and Derivatives
D-76128 Karlsruhe
Germany
+49 721 608 8187 (Phone)
+49 721 608 8190 (Fax)

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

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