A jump diffusion model for spot electricity prices and market price of risk |
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| Authors: | Ramaprasad Bhar David B Colwell Yuewen Xiao |
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| Institution: | 1. School of Risk & Actuarial Studies, University of New South Wales, Australia;2. School of Banking & Finance, University of New South Wales, Australia;3. Department of Accounting & Finance, University of Western Australia, Australia |
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| Abstract: | We construct a jump-diffusion model with seasonality, mean-reversion, time-dependent jump intensity and heteroskedastic disturbance for electricity spot prices, while keeping the analytical tractability of futures prices. We find that the jump component plays a considerably larger role than the diffusion component in the variance of spot prices. Moreover, the jump intensity is much higher during summer and winter. We also explore the seasonal market price of risk (MPR) with different maturities, from one month to five months. Our results show that the diffusion risk and the jump risk are priced quite differently. |
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| Keywords: | Jump diffusion Electricity price modeling Market price of risk Kalman filter |
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