Diffusion Entropy Analysis of Nordic Electricity Price Spikes

Summary

The study applies diffusion entropy analysis to Nordic spot electricity prices, a market shaped by varied influences but also exhibiting familiar speculative-market behavior such as clustering and mean reversion. It examines the waiting times between successive price spikes and reports anomalous scaling with a decaying power-law pattern. The observed exponent is described as having a robust relationship to the exponent implied by the entropy analysis.

The analysis also revisits clustering, mean reversion, and periodicity through the same framework. For modeling, it proposes a GARCH-inspired process applied directly to prices and suggests that stochastic-volatility models may offer a feasible description. The excerpt provides no sample dates, numerical estimates, forecast tests, or implementation details, so the strength of the findings and their usefulness for trading decisions cannot be judged here. It is a market characterization and modeling study rather than a documented profitable strategy.

Key ideas

• Diffusion entropy analysis is used to study Nordic spot electricity price dynamics.
• Waiting times between consecutive price spikes are reported to show anomalous scaling with a decaying power law.
• The study relates the observed scaling exponent to the exponent implied by its entropy analysis.
• It examines clustering, mean reversion, and periodicity.
• A GARCH-inspired model for prices is proposed, with stochastic volatility viewed as a feasible modeling approach.

Tags

# Entropy of the Nordic electricity market: anomalous scaling, spikes, and mean-reversion


# Entropy of the Nordic electricity market: anomalous scaling, spikes, and mean-reversion









The electricity market is a very peculiar market due to the large variety of phenomena that can affect the spot price. However, this market still shows many typical features of other speculative (commodity) markets like, for instance, data clustering and mean reversion. We apply the diffusion entropy analysis (DEA) to the Nordic spot electricity market (Nord Pool). We study the waiting time statistics between consecutive spot price spikes and find it to show anomalous scaling characterized by a decaying power-law. The exponent observed in data follows a quite robust relationship with the one implied by the DEA analysis. We also in terms of the DEA revisit topics like clustering, mean-reversion and periodicities. We finally propose a GARCH inspired model but for the price itself. Models in the context of stochastic volatility processes appear under this scope to have a feasible description.

Shown in full with attribution under the source's licence. Licence: abstract CC0

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