Regime Jumps in Electricity Prices

Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices. 5001-6182 Business 4001-4280.7 Finance Management, Business Finance, Corporation Finance Library of Congress Classification (LCC) HD 9502+ Energy policy / Energy industry M Business Administration and Business Economics G 3 Corporate Finance and Governance Journal of Economic Literature (JEL) Q 31 Demand and supply of nonrenewable resources 85 A Business General 220 A Financial Management European Business Schools Library Group (EBSLG) 220 T Quantitative methods for financial management Gemeenschappelijke Onderwerpsontsluiting (GOO) 85.00 Bedrijfskunde, Organisatiekunde: algemeen 85.30 Financieel management, financiering Classification GOO 83.65 Energie-economie Bedrijfskunde / Bedrijfseconomie Financieel management, bedrijfsfinanciering, besliskunde