A generalized Schwartz model for energy spot prices — Estimation using a particle MCMC method

Anne Floor Brix, Asger Lunde, Wei Wei

Research output: Contribution to journalArticleResearchpeer-review

2 Citations (Scopus)

Abstract

We investigate a large set of energy models that account for the stylized properties in energy prices, especially stochastic volatility and spikes. The models under consideration belong to the class of factor models while our full model features a two-factor price process and a two-component stochastic volatility process. The first factor in the price process captures the normal variations; the second accounts for spikes. The two-component volatility allows for a flexible autocorrelation structure. Instead of using various filtering techniques for splitting the factors, as often found in the literature, we estimate the model in one step using the particle MCMC method. We fit the models to both the spot market and the forward market for UK natural gas. We find that the inclusion of stochastic volatility is crucial for the statistical fit of spot prices whereas the spikes are important for explaining forward prices.

Original languageEnglish
Pages (from-to)560-582
Number of pages23
JournalEnergy Economics
Volume72
DOIs
Publication statusPublished - 1 May 2018

Keywords

  • Energy prices
  • Forward prices
  • Multi-factor model
  • Spikes
  • Stochastic volatility

Cite this

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A generalized Schwartz model for energy spot prices — Estimation using a particle MCMC method. / Brix, Anne Floor; Lunde, Asger; Wei, Wei.

In: Energy Economics, Vol. 72, 01.05.2018, p. 560-582.

Research output: Contribution to journalArticleResearchpeer-review

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