Stochastic price modeling of high volatility, mean-reverting, spike-prone commodities: The Australian wholesale spot electricity market
It is commonly known that wholesale spot electricity markets exhibit high price volatility, strong mean-reversion and frequent extreme price spikes. This paper employs a basic stochastic model, a mean-reverting model and a regime-switching model to capture these features in the Australian national electricity market (NEM), comprising the interconnected markets of New South Wales, Queensland, South Australia and Victoria. Daily spot prices from 1 January 1999 to 31 December 2004 are employed. The results show that the regime-switching model outperforms the basic stochastic and mean-reverting models. Electricity prices are also found to exhibit stronger mean-reversion after a price spike than in the normal period, and price volatility is more than fourteen times higher in spike periods than in normal periods. The probability of a spike on any given day ranges between 5.16% in NSW and 9.44% in Victoria.
Year of publication: |
2008
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Authors: | Higgs, Helen ; Worthington, Andrew |
Published in: |
Energy Economics. - Elsevier, ISSN 0140-9883. - Vol. 30.2008, 6, p. 3172-3185
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Publisher: |
Elsevier |
Keywords: | Wholesale spot electricity markets Volatility Price spikes Regime-switching Mean-reversion |
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