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Modeling Electricity Spot Prices -- Combining Mean-Reversion, Spikes and Stochastic Volatility

November 3, 2011

Starting with the liberalization of electricity trading, this market grew rapidly over the last decade. However, while spot and future markets are rather liquid nowadays, option trading is still limited. One of the potential reasons for this is that the spot price process of electricity is still puzzling researchers and practitioners. In this paper, we propose an approach to model spot prices that combines mean-reversion, spikes and stochastic volatility.