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Documents de travail (2003), ESSEC Business School

A Family of Reduced-form Models for Electricity Prices

This paper presents a family of processes to model electricity spot prices in deregulated market. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a "jump-reversion" component to properly represents these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture -for the first time to our knowledge- both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.

GEMAN, H. and RONCORONI, A. (2003). A Family of Reduced-form Models for Electricity Prices. ESSEC Business School.