Electricity Price Modelling with a Regime Switching Volatility

Silvana Musti () and Viviana Fanelli

Quaderni DSEMS from Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia

Abstract: We present a methodology to model electricity price dynamics by applying the interest rate theory toolkit. We construct the electricity market following [16] and applying the Heath, Jarrow and Morton ([7]) model. The electricity returns forward curve evolution using the Regime Switching Volatility is the instrument chosen to reflect into a simulating model the natural seasonality of electricity prices. The model calibration and the volatility parameters estimation allow to simulate in a realistic way the future electricity prices.

Date: 2010-06
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