Modeling and Estimating Volatility of Day-Ahead Electricity Prices

Abstract

We model day-ahead electricity prices of the UK power market using skew generalized error distribution. This distribution allows us to take into account the features of asymmetry, heavy tails, and a peak higher than in normal or Student’s t distributions. The adequacy of the estimated volatility model is verified using various tests and criteria. A correctly specified volatility model can be used for analyzing the impact of reforms or other events. We find that, after the start of the COVID-19 pandemic, price level and volatility increased.