Modelling jumps in electricity prices: theory and empirical evidence |
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Authors: | Jan Seifert Marliese Uhrig-Homburg |
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Affiliation: | 1.Chair of Financial Engineering and Derivatives,Universit?t Karlsruhe (TH),Karlsruhe,Germany |
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Abstract: | Objective of this paper is to enhance the understanding of modelling jumps and to analyse the model risk based on the jump component in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the effectiveness of different jump specifications. To this end, we calibrate the models to daily European Energy Exchange (EEX) market data through Markov Chain Monte Carlo based methods. To assess the quality of the estimated jump processes, we analyse their trajectorial and statistical properties. Moreover, even when the models are calibrated to a cross-section of derivative prices substantial model risk remains. |
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Keywords: | Electricity prices Jump diffusion Derivatives pricing Model risk |
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