2008/07 | LEM Working Paper Series | |
Volatility-price relationships in power exchanges: A demand-supply analysis |
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Sandro Sapio |
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Keywords | ||
Electricity, Market, Volatility, Supply Curve, Demand Curve, Fundamentals, Shocks.
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JEL Classifications | ||
C16, D4, L94.
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Abstract | ||
The evidence of volatility-price dependence observed in previous works
(Karakatsani and Bunn 2004; Bottazzi, Sapio and Secchi 2005; Simonsen
2005) suggests that there is more to volatility than simply
spikes. Volatility is found to be positively correlated with the
lagged price level in settings where market power is likely to be
particularly strong (UK on-peak sessions, the CalPX). Negative
correlation is instead observed in markets considered to be fairly
competitive, such as the NordPool. Prompted by these observations,
this paper aims to understand whether volatility-price patterns can
be mapped into different degrees of market competition, as the
evidence seems to suggest. Price fluctuations are modelled as
outcomes of dynamics in both sides of the market - demand and supply,
which in turn respond to shocks to the underlying preference and
technology fundamentals. Negative volatility-price dependence arises
if the market dynamics is accounted for by common shocks which affect
valuations uniformly. Positive dependence is related to the impact of
asymmetric shocks. The paper shows that under certain conditions,
these volatility-price patterns can be used to identify the exercise
of market power. Identification is however ruled out if all shocks
affect valuations uniformly.
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