Understanding the Fine Structure of Electricity Prices

Helyette Geman and A. Roncoroni
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Helyette Geman: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
A. Roncoroni: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a jump-reversion component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture - for the first time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.

Keywords: Electricity prices; jump diffusions; statistical estimation; calibration; simulation; energy price risk (search for similar items in EconPapers)
Date: 2006-04
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Citations: View citations in EconPapers (163)

Published in Journal of Business, 2006, 79 (3), pp.1-74

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00144198

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