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Title:Modeling electricity spot prices - Combining mean-reversion, spikes and stochastic volatility PDF Logo
Authors:Mayer, Klaus
Schmid, Thomas
Weber, Florian
Issue Date:2011
Series/Report no.:CEFS working paper series 2011-02
Abstract:Starting with the liberalization of electricity trading, this market grew rapidly over the last decade. However, while spot and future markets are rather liquid nowadays, option trading is still limited. One of the potential reasons for this is that the spot price process of electricity is still puzzling researchers and practitioners. In this paper, we propose an approach to model spot prices that combines mean-reversion, spikes and stochastic volatility. Thereby we use different mean-reversion rates for 'normal' and 'extreme' (spike) periods. Another feature of the model is its ability to capture correlation structures of electricity price spikes. Furthermore, all model parameters can easily be estimated with help of historical data. Consequently, we argue that this model does not only extend academic literature on electricity spot price modeling, but is also suitable for practical purposes, e.g. as underlying price model for option pricing.
Subjects:Electricity
Energy markets
Lévy processes
Mean-reversion
Spikes
Stochastic volatility
GARCH
JEL:G17
Document Type:Working Paper
Appears in Collections:CEFS Working Paper Series, Center for Entrepreneurial and Financial Studies, Technische Universität München

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