CALIBRATION OF MULTIFACTOR MODELS IN ELECTRICITY MARKETS

Abstract

Spot prices of electricity and other energy commodities are often modeled by multifactor stochastic processes. This poses a problem of estimating models' parameters based on historical data, i.e. calibrating them to markets. Here we show how a traditional tool of Kalman Filters can be successfuly applied to do this task. We study two mean-reverting log-spot price models and the Pilipovic model using correspondingly Kalman Filter the extended Kalman Filter. The results of applying this method to market data from several power exchanges are discussed.