Stochastic price modeling of high volatility, mean-reverting, spike-prone commodities: The Australian wholesale spot electricity market

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Title Stochastic price modeling of high volatility, mean-reverting, spike-prone commodities: The Australian wholesale spot electricity market
Author Higgs, Helen; Worthington, Andrew Charles
Journal Name Energy Economics
Editor RSJ Tol
Year Published 2008
Place of publication North Holland, Netherlands
Publisher Elsevier
Abstract 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 percent in NSW to 9.44 percent in Victoria.
Peer Reviewed Yes
Published Yes
Volume 30
Issue Number 6
Page from 3172
Page to 3185
ISSN 0140-9883
Date Accessioned 2009-01-16
Date Available 2009-04-17T07:10:31Z
Language en_AU
Research Centre Griffith Asia Institute
Faculty Griffith Business School
Subject Stochastic Analysis and Modelling; Time-Series Analysis
URI http://hdl.handle.net/10072/22289
Publication Type Journal Articles (Refereed Article)
Publication Type Code c1

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