Stochastic price modeling of high volatility, mean-reverting, spike-prone commodities: The Australian wholesale spot electricity market

Helen Higgs and Andrew Worthington

Energy Economics, 2008, vol. 30, issue 6, 3172-3185

Abstract: It is commonly known that wholesale spot electricity markets exhibit high price volatility, strong mean-reversion and frequent extreme price spikes. This paper employs a basic stochastic model, a mean-reverting model and a regime-switching model to capture these features in the Australian national electricity market (NEM), comprising the interconnected markets of New South Wales, Queensland, South Australia and Victoria. Daily spot prices from 1 January 1999 to 31 December 2004 are employed. The results show that the regime-switching model outperforms the basic stochastic and mean-reverting models. Electricity prices are also found to exhibit stronger mean-reversion after a price spike than in the normal period, and price volatility is more than fourteen times higher in spike periods than in normal periods. The probability of a spike on any given day ranges between 5.16% in NSW and 9.44% in Victoria.

Keywords: Wholesale; spot; electricity; markets; Volatility; Price; spikes; Regime-switching; Mean-reversion (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (75)

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