The stability of electricity prices: Estimation and inference of the Lyapunov exponents

The aim of this paper is to illustrate how the stability of a stochastic dynamic system is measured using the Lyapunov exponents. Specifically, we use a feedforward neural network to estimate these exponents as well as asymptotic results for this estimator to test for unstable (chaotic) dynamics. The data set used is spot electricity prices from the Nordic power exchange market, Nord Pool, and the dynamic system that generates these prices appears to be chaotic in one case since the null hypothesis of a non-positive largest Lyapunov exponent is rejected at the 1 per cent level.