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A jump diffusion model for spot electricity prices and market price of risk

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  • Bhar, Ramaprasad
  • Colwell, David B.
  • Xiao, Yuewen

Abstract

We construct a jump-diffusion model with seasonality, mean-reversion, time-dependent jump intensity and heteroskedastic disturbance for electricity spot prices, while keeping the analytical tractability of futures prices. We find that the jump component plays a considerably larger role than the diffusion component in the variance of spot prices. Moreover, the jump intensity is much higher during summer and winter. We also explore the seasonal market price of risk (MPR) with different maturities, from one month to five months. Our results show that the diffusion risk and the jump risk are priced quite differently.

Suggested Citation

  • Bhar, Ramaprasad & Colwell, David B. & Xiao, Yuewen, 2013. "A jump diffusion model for spot electricity prices and market price of risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(15), pages 3213-3222.
    • Handle: RePEc:eee:phsmap:v:392:y:2013:i:15:p:3213-3222
    DOI: 10.1016/j.physa.2013.03.026
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    References listed on IDEAS

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    Cited by:

    1. Deschatre, Thomas & Féron, Olivier & Gruet, Pierre, 2021. "A survey of electricity spot and futures price models for risk management applications," Energy Economics, Elsevier, vol. 102(C).
    2. Elmore, Clay T. & Dowling, Alexander W., 2021. "Learning spatiotemporal dynamics in wholesale energy markets with dynamic mode decomposition," Energy, Elsevier, vol. 232(C).
    3. Xiao, Weilin & Zhang, Xili, 2016. "Pricing equity warrants with a promised lowest price in Merton’s jump–diffusion model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 219-238.
    4. Weron, Rafał, 2014. "Electricity price forecasting: A review of the state-of-the-art with a look into the future," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1030-1081.
    5. G P Girish & Aviral Kumar Tiwari, 2016. "A comparison of different univariate forecasting models forSpot Electricity Price in India," Economics Bulletin, AccessEcon, vol. 36(2), pages 1039-1057.

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