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Stochastic Price Modelling Of High Volatility, Mean-Reverting, Spike-Prone Commodities: The Australian Wholesale Electricity Market, H. Higgs, A. C. Worthington
Stochastic Price Modelling Of High Volatility, Mean-Reverting, Spike-Prone Commodities: The Australian Wholesale Electricity Market, H. Higgs, A. C. Worthington
Faculty of Business - Accounting & Finance Working Papers
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 …