Practical stochastic modelling of electricity prices

Michel Culot, Valérie Goffin, Steve Lawford, Sébastien de Meten and Yves Smeers
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Michel Culot: Electrabel SA - Electrabel SA
Valérie Goffin: FUNDP - UNamur - Université de Namur [Namur]
Sébastien de Meten: Electrabel SA - Electrabel SA
Yves Smeers: Department of Mathematical Engineering - UCL - Université Catholique de Louvain = Catholic University of Louvain

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Abstract: We develop a flexible multifactor stochastic model with Markov regime-switching spikes, for daily spot and forward electricity. The model captures various stylized features of power prices, including mean reversion and seasonal patterns, and short- lived spikes. Parameters are estimated through a practical two-step procedure, that combines pre-calibration of deterministic elements and spikes, and state-space estimation of diffusive factors. We use several results on affine jump diffusions to combine the spike and diffusive components, and to provide convenient closed-form solutions for important power derivatives. We also propose a simple nonparametric model for hourly spot prices, based on hourly profile sampling from historical data. This model can reproduce complicated intraday patterns, and enables fast numerical pricing of hourly options. We illustrate the performance of the daily and hourly models using data from the Amsterdam Power Exchange.

Keywords: affine jump diffusions; efficient option pricing; electricity and energy markets; regime-switching spikes; state-space (Kalman filter) estimation (search for similar items in EconPapers)
Date: 2013-04
Note: View the original document on HAL open archive server: https://enac.hal.science/hal-01021603
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Citations: View citations in EconPapers (6)

Published in The journal of energy markets, 2013, 6 (1), pp 1-40

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