Estimation of the number of factors in a multi-factorial Heath-Jarrow-Morton model in electricity markets

Olivier Feron () and Pierre Gruet
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Olivier Feron: EDF - EDF, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CREST - EDF R&D - EDF R&D - EDF - EDF
Pierre Gruet: EDF - EDF, FiME Lab - Laboratoire de Finance des Marchés d'Energie - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CREST - EDF R&D - EDF R&D - EDF - EDF

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Abstract: In this paper we study the calibration of specific multi-factorial Heath-Jarrow-Morton models to electricity market prices, with a focus on the estimation of the optimal number of factors. We describe a common statistical procedure based on likelihood maximisation and Akaike / Bayesian information criteria, in the case of calibration on futures prices, as well as on both spot and futures prices. We perform a detailed analysis on 6 European markets: Belgium, France, Germany, Italy, Switzerland and UK. The results show a lot of similarities on all the markets considered, especially on the optimal number of factors equal to 5; and on the behaviour of the different factors.

Keywords: Electricity markets; model calibration; model selection; power price model (search for similar items in EconPapers)
Date: 2020-06-25
New Economics Papers: this item is included in nep-ene
Note: View the original document on HAL open archive server: https://hal.science/hal-02880824v1
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