Characterizing the Volatility of Wholesale Electricity Spot Prices in Australia

Abstract

Understanding the volatility dynamics of electricity markets is important in evaluating the deregulation experience and in pricing electricity futures. This paper introduced an approach to portray the volatility of electricity price. We first introduced the Integrated Volatility (IV) and Quadratic Variation (QR) theory to define the volatility. Based on the theories, two nonparametric methods, i.e. Classical Realized Volatility (RV) and Realized Bi-power Volatility (RBV) were adopted to respectively measure the electricity price volatility with half-hour resolution in High-Frequency (HF) environment, using historical data from Victoria, Australia. By comparing the characterizing performance, the RBV method exhibited more superior effect. Next, the paper separated the total volatility into jump and continuous components based on Z jump test and the distinct dynamics of the Jump Volatility (JV) and Continuous Volatility (CV) were also analyzed.