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Electricity price modeling with stochastic time change

Svetlana Borovkova and Maren Diane Schmeck

Energy Economics, 2017, vol. 63, issue C, 51-65

Abstract: In this paper, we develop a novel approach to electricity price modeling, based on the powerful technique of stochastic time change. This technique allows us to incorporate the characteristic features of electricity prices (such as seasonal volatility, time varying mean reversion and seasonally occurring price spikes) into the model in an elegant and economically justifiable way. The stochastic time change introduces stochastic as well as deterministic (e.g., seasonal) features in the price process' volatility and in the jump component.

Keywords: Electricity prices; Stochastic time change; Activity rate; Mean reversion; Jump diffusion (search for similar items in EconPapers)
JEL-codes: Q41 C13 C22 C51 (search for similar items in EconPapers)
Date: 2017
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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