The fine structure of electricity price volatility

2026-05-13

AI Summary

This study addresses the limitation of traditional finite-dimensional models in capturing the infinite-dimensional stochastic features of electricity prices by treating day-ahead prices as local averages of a latent process driven by a stochastic partial differential equation (SPDE). It proposes, for the first time, a volatility estimation framework grounded in infinite-dimensional semimartingale theory, applied to a comprehensive European panel of electricity price data. By introducing a weekly integrated variance estimator and leveraging semigroup smoothing effects alongside conditional state-variable analysis, the authors conduct empirical investigations across Germany, Norway, and Spain. The results reveal significant heterogeneity in volatility drivers across regions, with distinct influences from generation mix, and demonstrate that the apparent leverage effect vanishes once state variables are controlled, indicating that electricity price volatility is generally not asymmetric.

Abstract

We conduct the first rigorous study of electricity price volatility for the full panel of electricity prices across three European generation zones. By interpreting the observed day-ahead prices as local averages of a latent price process governed by a stochastic partial differential equation, we develop estimators of the weekly integrated variance. The inherently infinite dimensional setting introduce several complications that are not relevant in the conventional finite dimensional semimartingale setting, and we spend considerable effort in dealing with these. In particular, we must account for both mean-reversion in prices and semigroup-smoothing in the estimated variance. We provide a detailed decomposition and interpretation of the empirical estimates across three vastly different European generation zones, namely Germany, Norway, and Spain. Our findings indicate that each zone has very different drivers of volatility, and that the impact of generation variables differs considerably. We document that leverage effects appear to be present at first sight, but disappear once we condition on suitable state variables, thereby showing that electricity price volatility does not generally exhibit asymmetric responses to price shocks.

Problem

• electricity price volatility
• stochastic partial differential equation
• integrated variance
• leverage effect
• generation zones

Innovation

• stochastic partial differential equation
• integrated variance estimation
• infinite-dimensional semimartingale
• mean-reversion
• leverage effect