The stochastic behavior of electricity prices under scrutiny: Evidence from spot and futures markets

Jean-François Bégin, Fabio Gómez, Katja Ignatieva and Han Li

Energy Economics, 2025, vol. 144, issue C

Abstract: This article proposes a stochastic volatility jump–diffusion model for pricing electricity derivative contracts. The main objective is to develop a model that effectively captures the characteristics and stylized facts of the electricity spot market, such as mean reversion, changing expectations in the spot price’s long-run level, seasonality, extreme volatility, price spikes, and time-varying jump intensity. We employ a particle filter that relies on both spot prices and futures data to estimate model parameters. The results demonstrate that incorporating the aforementioned features is crucial for accurately fitting both spot and futures prices, as evidenced by data from the Australian electricity market.

Keywords: Electricity derivatives; Futures; Stochastic volatility; Jump–diffusion models; Affine models; Particle filtering (search for similar items in EconPapers)
JEL-codes: C00 C01 C02 C10 C13 C58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:144:y:2025:i:c:s0140988325001197

DOI: 10.1016/j.eneco.2025.108296

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