Review of Derivatives Research

, Volume 10, Issue 1, pp 59–85 | Cite as

Modelling jumps in electricity prices: theory and empirical evidence

Article

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.

Keywords

Electricity prices Jump diffusion Derivatives pricing Model risk 

Mathematics Subject Classification (2000)

C11 G12 G13 Q4 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Chair of Financial Engineering and DerivativesUniversität Karlsruhe (TH)KarlsruheGermany

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