Estimation of the number of factors in a multi-factorial Heath-Jarrow-Morton model in electricity markets

Olivier Feron (1, 2) , Pierre Gruet (1, 2)

1 EDF - EDF
2 FiME Lab - Laboratoire de Finance des Marchés d'Energie

In this paper we study the calibration of specific multi-factorial Heath-Jarrow-Morton models to electricity market prices, with a focus on the estimation of the optimal number of factors. We describe a common statistical procedure based on likelihood maximisation and Akaike / Bayesian information criteria, in the case of calibration on futures prices, as well as on both spot and futures prices. We perform a detailed analysis on 6 European markets: Belgium, France, Germany, Italy, Switzerland and UK. The results show a lot of similarities on all the markets considered, especially on the optimal number of factors equal to 5; and on the behaviour of the different factors.

Mots clés: Electricity markets; model calibration; model selection; power price model

Domaines: Econométrie de la finance [q-fin.ST]; Gestion des risques [q-fin.RM]; Pricing [q-fin.PR]

Olivier Feron, Pierre Gruet. Estimation of the number of factors in a multi-factorial Heath-Jarrow-Morton model in electricity markets. 2020. ⟨hal-02880824⟩