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Markov Chain Monte Carlo Estimation of a Multi-Factor Jump Diffusion Model for Power Prices

Green, Rikard LU and Nossman, Marcus LU (2008) In Journal of Energy Markets 1(4). p.65-90
Abstract
In this paper we generalize the electricity spot price model of Lucia and Schwartz by a two-factor model with jumps and stochastic volatility. We estimate the model on daily spot price data from the Nordic market using an approach that combines traditional statistical methods with a Markov chain Monte Carlo algorithm. Results show that the model captures most of the trajectorial and the statistical characteristics of the electricity spot price. Further, we find that the inclusion of stochastic volatility is crucial to separate spikes from the normal price process. Moreover, we estimate that the correlation between the spot price and its stochastic volatility is negative.
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
stochastic volatility, spot price, electricity markets, spikes
in
Journal of Energy Markets
volume
1
issue
4
pages
65 - 90
publisher
Incisive Media
ISSN
1756-3615
language
English
LU publication?
yes
id
c68f7f52-b5d0-41f3-9274-edb19993c320 (old id 2203823)
date added to LUP
2011-11-15 08:56:58
date last changed
2016-04-15 21:08:56
@article{c68f7f52-b5d0-41f3-9274-edb19993c320,
  abstract     = {In this paper we generalize the electricity spot price model of Lucia and Schwartz by a two-factor model with jumps and stochastic volatility. We estimate the model on daily spot price data from the Nordic market using an approach that combines traditional statistical methods with a Markov chain Monte Carlo algorithm. Results show that the model captures most of the trajectorial and the statistical characteristics of the electricity spot price. Further, we find that the inclusion of stochastic volatility is crucial to separate spikes from the normal price process. Moreover, we estimate that the correlation between the spot price and its stochastic volatility is negative.},
  author       = {Green, Rikard and Nossman, Marcus},
  issn         = {1756-3615},
  keyword      = {stochastic volatility,spot price,electricity markets,spikes},
  language     = {eng},
  number       = {4},
  pages        = {65--90},
  publisher    = {Incisive Media},
  series       = {Journal of Energy Markets},
  title        = {Markov Chain Monte Carlo Estimation of a Multi-Factor Jump Diffusion Model for Power Prices},
  volume       = {1},
  year         = {2008},
}