Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2001:19: Extreme Value Theory and Extremely Large Electricity Price Changes

Hans Byström ()
Additional contact information
Hans Byström: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Nord Pool, the first multinational exchange for electricity trading, has existed since January 1996. Typical characteristics of electricity prices on Nord Pool are a very high volatility and a large number of very large, or extreme, price changes. In this paper we look at hourly spot prices on NordPool and apply extreme value theory to investigate the tails of the price change distribution. We find a good fit of both the generalized extreme value distribution and the generalized Pareto distribution to AR-GARCH filtered price change series, and accurate estimates as well as forecasts of extreme quantiles are produced. Generally, our results suggest extreme value theory to be of interest to both risk managers and portfolio managers in the highly volatile electricity market.

Keywords: electricity prices; conditional extreme value theory; GARCH; tail quantiles

JEL-codes: C22; C53; G19; Q49

22 pages, October 15, 2001

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