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Multi-Factor Jump-Diffusion Models Of Electricity Prices

Author

Listed:
  • THILO MEYER-BRANDIS

    (Center of Mathematics for Applications, University of Oslo, P. O. Box 1053, Blindern, Norway)

  • PETER TANKOV

    (Laboratoire de Probabilités et Modèles Aléatoires, 13 Université Paris-Diderot (Paris 7), Case 7012, 2 Place Jussieu, 75251 Paris Cedex 05, France)

Abstract

The recent deregulation of electricity markets has led to the creation of energy exchanges, where the electricity is freely traded. In this paper, we study the most salient statistical features of electricity prices with a particular attention to the European energy exchanges. These features can be adequately reproduced by the sum-OU model: a model representing the price as a sum of Lévy-driven Ornstein–Uhlenbeck (OU) processes. We present a new method for filtering out the different OU components and develop a statistical procedure for estimating the sum-OU model from data.

Suggested Citation

  • Thilo Meyer-Brandis & Peter Tankov, 2008. "Multi-Factor Jump-Diffusion Models Of Electricity Prices," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(05), pages 503-528.
    • Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:05:n:s0219024908004907
    DOI: 10.1142/S0219024908004907
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    References listed on IDEAS

    as
    1. Rafal Weron, 2005. "Heavy tails and electricity prices," HSC Research Reports HSC/05/02, Hugo Steinhaus Center, Wroclaw University of Science and Technology.
    2. Villaplana Conde, Pablo, 2003. "Pricing power derivatives: a two-factor jump-diffusion approach," DEE - Working Papers. Business Economics. WB wb031805, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
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