Econometrics Seminar - Wei Wei (Monash University)

Title: Identifying Uncertainties from Multiple Factors: A Study on Electricity Prices

Abstract: Using a multi-factor model, we separate the uncertainties in electricity spot prices into three risk factors: long run equilibrium prices, short run deviations, and spikes. The model is estimated using the particle Markov chain Monte Carlo method and is applied to the Germany/Austria electricity market. Our spot market model renders close-form solution to futures prices, and the estimation results suggest that different risk factors have distinct impacts on futures prices; in particular, the long run prices govern the futures price dynamics. Using futures prices from monthly and quarterly contracts, we identify the market price of different risk factors and we find evidence that the market price of risk is time-varying.