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Electricity Price Modelling with a Regime Switching Volatility

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  • Silvana Musti
  • Viviana Fanelli

Abstract

We present a methodology to model electricity price dynamics by applying the interest rate theory toolkit. We construct the electricity market following [16] and applying the Heath, Jarrow and Morton ([7]) model. The electricity returns forward curve evolution using the Regime Switching Volatility is the instrument chosen to reflect into a simulating model the natural seasonality of electricity prices. The model calibration and the volatility parameters estimation allow to simulate in a realistic way the future electricity prices.

Suggested Citation

  • Silvana Musti & Viviana Fanelli, 2010. "Electricity Price Modelling with a Regime Switching Volatility," Quaderni DSEMS 06-2010, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia.
    • Handle: RePEc:ufg:qdsems:06-2010
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