posted on 2024-11-15, 23:04authored byH Higgs, A C Worthington
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 regimeswitching 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.
History
Citation
This working paper was originally published as Higgs, H and Worthington, AC, Stochastic Price Modelling of High Volatility, Mean-reverting, Spike-prone Commodities: The Australian Wholesale Electricity Market, Accounting & Finance Working Paper 06/02, School of Accounting & Finance, University of Wollongong, 2006.