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Mean-Reverting Lévy Jump Dynamics in the European Power Sector

Author

Listed:
  • Julien Chevallier

    (AGM - UMR 8088 - Analyse, Géométrie et Modélisation - CNRS - Centre National de la Recherche Scientifique - CY - CY Cergy Paris Université)

  • Stéphane Goutte

    (LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique)

Abstract

This chapter analyzes the interactions between the electricity and CO2 (carbon) markets. In particular, we describe the dynamics of the fuelswitching price (from coal to gas) when taking into account carbon costs. Several stochastic processes are considered to model the fuel-switching price: (i) the Brownian motion, and (ii) the Lévy jump process. Besides, the probability density function is evaluated by considering the Gaussian case versus the Normal Inverse Gaussian (NIG) and the Variance Gamma (VG) distributions. The results unambiguously point out the need to resort to jump modeling techniques to model satisfactorily the fuel-switching price with evidence of heavy tails. The assumption of a Gaussian distribution is also clearly rejected in favor of its main competitors, whereas it is found that the NIG beats the VG distribution. Taken together, these empirical results convey implications for risk managers looking to forecast and hedge their utilities’ production.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Julien Chevallier & Stéphane Goutte, 2017. "Mean-Reverting Lévy Jump Dynamics in the European Power Sector," Post-Print halshs-02157475, HAL.
    • Handle: RePEc:hal:journl:halshs-02157475
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    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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