Modelling electricity forward curve dynamics in the Italian market

Silvana Musti () and Viviana Fanelli ()

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

Abstract: In this paper we discuss the modelling of electricity contracts traded in the Italian market. We directly model the forward price of the electricity. We apply the Heath Jarrow Morton model in order to simulate the forward rate dynamics and evaluate first the forward price with instantaneous delivery time and then the "swap price" with delivery over a period. We use a regime-switching model to introduce jumps and spikes that depend on the state of the system. Thus the model describes the properties of the electricity price dynamics both in a base stable regime and in a spike regime. A numerical algorithm is developed to simulate swap price trajectories.

Keywords: Electricity prices; HJM model, Jump-diffusions; Regimeswitches; Spikes. (search for similar items in EconPapers)
Pages: 11 pages
Date: 2008-11
New Economics Papers: this item is included in nep-ene
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Citations: View citations in EconPapers (1)

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