nep-ene New Economics Papers
on Energy Economics
Issue of 2012‒02‒15
one paper chosen by
Roger Fouquet
Basque Climate Change Centre, Bilbao, Spain

  1. Modeling electricity spot prices using mean-reverting multifractal processes By Martin Rypdal; Ola L{\o}vsletten

  1. By: Martin Rypdal; Ola L{\o}vsletten
    Abstract: We discuss stochastic modeling of volatility persistence and anti-correlations in electricity spot prices, and for this purpose we present two mean-reverting versions of the multifractal random walk (MRW). In the first model the anti-correlations are modeled in the same way as in an Ornstein-Uhlenbeck process, i.e. via a drift (damping) term, and in the second model the anti-correlations are included by letting the innovations in the MRW model be fractional Gaussian noise with H < 1/2. For both models we present approximate maximum likelihood methods, and we apply these methods to estimate the parameters for the spot prices in the Nordic electricity market. The maximum likelihood estimates show that electricity spot prices are characterized by scaling exponents that are significantly different from the corresponding exponents in stock markets, confirming the exceptional nature of the electricity market. In order to compare the damped MRW model with the fractional MRW model we use ensemble simulations and wavelet-based variograms, and we observe that certain features of the spot prices are better described by the damped MRW model. The characteristic correlation time is estimated to approximately half a year.
    Date: 2012–01

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