Polynomial processes for power prices

Damir Filipovic, Martin Larsson and Tony Ware

Papers from arXiv.org

Abstract: Polynomial processes have the property that expectations of polynomial functions (of degree $n$, say) of the future state of the process conditional on the current state are given by polynomials (of degree $\leq n$) of the current state. Here we explore the application of polynomial processes in the context of structural models for energy prices. We focus on the example of Alberta power prices, derive one- and two-factor models for spot prices. We examine their performance in numerical experiments, and demonstrate that the richness of the dynamics they are able to generate makes them well suited for modelling even extreme examples of energy price behaviour.

Date: 2017-10, Revised 2018-04
New Economics Papers: this item is included in nep-ene
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