Electricity price modelling with stochastic volatility and jumps: An empirical investigation
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Date
2021-06
Publication Type
Journal Article
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yes
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Abstract
Over the past few years, the electricity derivatives market has experienced a substantial growth in the volume of trade and the diversity of available products. This has led to a rich data environment that requires more sophisticated and accurate modelling approaches for electricity spot prices. This paper deals with an analysis of continuous-time stochastic volatility jump-diffusion processes in the context of pricing of futures contracts written on electricity spots. We formulate a variety of models which aim to capture the most prominent characteristics and stylised facts of the electricity spot market including mean reversion, seasonality, extreme volatility, and spikes. The proposed modelling framework extends the existing models by incorporating mean reversion, stochastic volatility, and jumps in both the underlying spot price process and its volatility. The modelling parameters are estimated using the Markov Chain Monte Carlo (MCMC) technique for the Australian electricity market. We find that incorporating stochastic volatility and jumps in both the underlying electricity spot price and its volatility is absolutely essential to accurately fit the observed electricity spot prices. We derive futures prices in a semi-closed form and confirm flexibility of the proposed models by their ability to fit the observed spot and futures prices in the Australian electricity market.
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published
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Journal / series
Volume
98
Pages / Article No.
105260
Publisher
Elsevier
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Subject
power markets; electricity spot markets; electricity modelling; energy derivatives; stochastic volatility; jump diffusion models; futures pricing
Organisational unit
02204 - RiskLab / RiskLab
09557 - Cheridito, Patrick / Cheridito, Patrick