Modeling electricity spot prices - Combining mean-reversion, spikes and stochastic volatility

Klaus Mayer, Thomas Schmid and Florian Weber

No 2011-02, CEFS Working Paper Series from Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS)

Abstract: Starting with the liberalization of electricity trading, this market grew rapidly over the last decade. However, while spot and future markets are rather liquid nowadays, option trading is still limited. One of the potential reasons for this is that the spot price process of electricity is still puzzling researchers and practitioners. In this paper, we propose an approach to model spot prices that combines mean-reversion, spikes and stochastic volatility. Thereby we use different mean-reversion rates for 'normal' and 'extreme' (spike) periods. Another feature of the model is its ability to capture correlation structures of electricity price spikes. Furthermore, all model parameters can easily be estimated with help of historical data. Consequently, we argue that this model does not only extend academic literature on electricity spot price modeling, but is also suitable for practical purposes, e.g. as underlying price model for option pricing.

Keywords: Electricity; Energy markets; Lévy processes; Mean-reversion; Spikes; Stochastic volatility; GARCH (search for similar items in EconPapers)
JEL-codes: G17 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ene
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cefswp:201102

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