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Article: Modeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility

TitleModeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility
Authors
KeywordsLévy processes
mean reversion
spikes
stochastic volatility
Issue Date2015
PublisherRoutledge. The Journal's web site is located at http://www.tandf.co.uk/journals/titles/1351847X.asp
Citation
The European Journal of Finance, 2015, v. 21 n. 4, p. 292-315 How to Cite?
AbstractWith the liberalization of electricity trading, the electricity market has grown rapidly over the last decade. However, while spot and future markets are currently rather liquid, option trading is still limited. One of the potential reasons for this is that the electricity spot price process remains a puzzle to researchers and practitioners. In this paper, we propose an approach to model electricity spot prices that combines mean reversion, spikes, negative prices, and stochastic volatility. Thereby, we use different mean reversion rates for ‘normal’ and ‘extreme’ (spike) periods. Furthermore, all model parameters can easily be estimated using historical data. Consequently, we argue that this model does not only extend the academic literature on electricity spot price modeling, but is also suitable for practical purposes, such as an underlying price model for option pricing. © 2012 Taylor & Francis.
Persistent Identifierhttp://hdl.handle.net/10722/210039
ISSN
2015 Impact Factor: 0.559
2015 SCImago Journal Rankings: 0.465

 

DC FieldValueLanguage
dc.contributor.authorMayer, K-
dc.contributor.authorSchmid, T-
dc.contributor.authorWeber, F-
dc.date.accessioned2015-05-21T02:36:52Z-
dc.date.available2015-05-21T02:36:52Z-
dc.date.issued2015-
dc.identifier.citationThe European Journal of Finance, 2015, v. 21 n. 4, p. 292-315-
dc.identifier.issn1351-847X-
dc.identifier.urihttp://hdl.handle.net/10722/210039-
dc.description.abstractWith the liberalization of electricity trading, the electricity market has grown rapidly over the last decade. However, while spot and future markets are currently rather liquid, option trading is still limited. One of the potential reasons for this is that the electricity spot price process remains a puzzle to researchers and practitioners. In this paper, we propose an approach to model electricity spot prices that combines mean reversion, spikes, negative prices, and stochastic volatility. Thereby, we use different mean reversion rates for ‘normal’ and ‘extreme’ (spike) periods. Furthermore, all model parameters can easily be estimated using historical data. Consequently, we argue that this model does not only extend the academic literature on electricity spot price modeling, but is also suitable for practical purposes, such as an underlying price model for option pricing. © 2012 Taylor & Francis.-
dc.languageeng-
dc.publisherRoutledge. The Journal's web site is located at http://www.tandf.co.uk/journals/titles/1351847X.asp-
dc.relation.ispartofThe European Journal of Finance-
dc.subjectLévy processes-
dc.subjectmean reversion-
dc.subjectspikes-
dc.subjectstochastic volatility-
dc.titleModeling electricity spot prices: combining mean reversion, spikes, and stochastic volatility-
dc.typeArticle-
dc.identifier.emailSchmid, T: schmid@hku.hk-
dc.identifier.authoritySchmid, T=rp02028-
dc.identifier.doi10.1080/1351847X.2012.716775-
dc.identifier.scopuseid_2-s2.0-84923866829-
dc.identifier.volume21-
dc.identifier.issue4-
dc.identifier.spage292-
dc.identifier.epage315-
dc.publisher.placeUnited Kingdom-

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