infonet-economy

The challenge in modelling electricity prices is mainly caused by it’s non-storability. Spot prices are thus determined by the current demand/supply interaction, but hardly by expectations about the future. They show characteristics as mean-reversion, seasonal patterns, an immense volatility and spikes, which cannot be captured with standard stock market models. On contrary, there exists growing markets, where financial futures contracts are traded. These contracts are storable and show similar characteristics to other financial assets. In particular they feature a significant lower volatility then spot prices. Moreover, the volatility is decreasing in the time to maturity.