Correlation noise and delay time enhanced stability of electricity futures market

Abstract

We explore the roles of information time delay and noise correlation on the stability of electricity market by the method of mean first passage time (MFPT) and delayed Heston model. We employ the least square method of probability distribution to estimate the parameters of the proposed model with the closing price data of electricity futures daily of the European Energy Exchange. Then the probability density functions of the price returns are empirically compared between both the simulated data from the delayed Heston model and the electricity futures data, and a good agreement can be found between them. Through the stochastic simulation of the mean first passage time of returns, some results show that: (i) the phenomenon of correlation enhancing stability can be observed in MFPT versus mean reversion of volatility; (ii) we can observe that the delay time and the growth rate can induce the critical phenomenon; (iii) there are optimal values of volatility parameters matching maximum stability of electricity futures price. In addition, the increased growth rate and the delay time enhance the stability of electricity futures price.