Modeling electricity spot prices - Combiningmean-reversion, spikes and stochasticvolatility
Starting with the liberalization of electricity trading, this market grew rapidly overthe last decade. However, while spot and future markets are rather liquid nowadays,option trading is still limited. One of the potential reasons for this is that the spotprice process of electricity is still puzzling researchers and practitioners. In this paper,we propose an approach to model spot prices that combines mean-reversion,spikes and stochastic volatility. Thereby we use different mean-reversion rates for"normal" and "extreme" (spike) periods. Another feature of the model is its abilityto capture correlation structures of electricity price spikes. Furthermore, all modelparameters can easily be estimated with help of historical data. Consequently, weargue that this model does not only extend academic literature on electricity spotprice modeling, but is also suitable for practical purposes, e.g. as underlying pricemodel for option pricing.
G17 - Financial Forecasting ; Financial theory ; Management of financial services: stock exchange and bank management science (including saving banks) ; Individual Working Papers, Preprints ; No country specification