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Understanding the Fine Structure of Electricity Prices

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Author Info
Hélyette Geman (Birkbeck, University of London and ESSEC Business School)
Andrea Roncoroni (ESSEC Business School)
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 U.S. power markets.

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File URL: http://www.journals.uchicago.edu/cgi-bin/resolve?JB790308
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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 79 (2006)
Issue (Month): 3 (May)
Pages: 1225-1262
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1225-1262

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  1. Silvana Musti & Viviana Fanelli, 2008. "Modelling electricity forward curve dynamics in the Italian market," Quaderni DSEMS 20-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia. [Downloadable!]
  2. repec:mop:credwp:08.09.77 is not listed on IDEAS
  3. Marcelo G. Figueroa, 2006. "Pricing Multiple Interruptible-Swing Contracts," Birkbeck Working Papers in Economics and Finance 0606, Birkbeck, School of Economics, Mathematics & Statistics. [Downloadable!]
  4. T M Christensen & A S Hurn & K A Lindsay, 2008. "It never rains but it pours: Modelling the persistence of spikes in electricity prices," NCER Working Paper Series 25, National Centre for Econometric Research. [Downloadable!]
  5. Trueck, Stefan & Weron, Rafal & Wolff, Rodney, 2007. "Outlier Treatment and Robust Approaches for Modeling Electricity Spot Prices," MPRA Paper 4711, University Library of Munich, Germany. [Downloadable!]
  6. T M Christensen & A. S. Hurn & K A Lindsay, 2008. "Discrete time-series models when counts are unobservable," NCER Working Paper Series 35, National Centre for Econometric Research. [Downloadable!]
  7. Alvaro Cartea & Marcelo G. Figueroa & Helyette Geman, 2008. "Modelling Electricity Prices with Forward Looking Capacity Constraints," Birkbeck Working Papers in Economics and Finance 0802, Birkbeck, School of Economics, Mathematics & Statistics. [Downloadable!]
  8. Albanese, Claudio & Lo, Harry & Stathis, Tompaidis, 2006. "A Numerical Method for Pricing Electricity Derivatives for Jump-Diffusion Processes Based on Continuous Time Lattices," MPRA Paper 5245, University Library of Munich, Germany. [Downloadable!]
  9. Fulvio Corsi & Davide Pirino & Roberto Renò, 2008. "Volatility forecasting: the jumps do matter," Department of Economics University of Siena 534, Department of Economics, University of Siena. [Downloadable!]
  10. Jan Seifert & Marliese Uhrig-Homburg, 2007. "Modelling jumps in electricity prices: theory and empirical evidence," Review of Derivatives Research, Springer, vol. 10(1), pages 59-85, January. [Downloadable!] (restricted)
  11. Xun Li & Zhenyu Wu, 2006. "A semi-analytic method for valuing high-dimensional options on the maximum and minimum of multiple assets," Annals of Finance, Springer, vol. 2(2), pages 179-205, March. [Downloadable!] (restricted)
  12. Fulvio Corsi & Davide Pirino & Roberto Reno, 2009. "Volatility Forecasting: The Jumps Do Matter," Global COE Hi-Stat Discussion Paper Series gd08-036, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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