Title: Identifying uncertainties from multiple factors: A study on electricity price
Authors: Wei Wei - Monash University (Australia) [presenting]
Asger Lunde - Aarhus University and CREATES (Denmark)
Abstract: Using a multi-factor model, the uncertainties in electricity spot prices are separated into three risk factors: spikes, base-signals, and stochastic volatility. The model is estimated using the particle Markov chain Monte Carlo method and is applied to the Germany/Austria electricity market. Our results indicate that spike shocks are large and infrequent, and they usually die out within a day, while base-signals are more persistent than spikes. Moreover, the observed clustering of large price movements is explained by stochastic volatility. We apply our estimates in the spot market to the futures market and find that different risk factors have distinct impacts on futures prices. In particular, the base-signal dynamics govern the futures price dynamics. Lastly, we find evidence that the market price of both spike risk and base-signal risk are time-varying.