Estimating fast mean-reverting jumps in electricity Market models - Thomas Deschatre, Olivier Féron, and Marc Hoffmann

Based on empirical evidence of fast mean-reverting spikes, we model electricity price processes as the sum of a continuous Itö semimartingale and a a mean-reverting compound Poisson process. In a first part, we investigate the estimation of the two parameters of the Poisson process from discrete observations and establish asymptotic efficiency in various asymptotic settings. In a second part, we discuss the use of our inference results for correcting the value of forward contracts on electricity markets in presence of spikes. We implement our method on real data
in the French, Greman and Australian market over 2015 and 2016 and show in particular the effect of spike modelling on the valuation of certain strip options. In particular, we show that
some out-of-the-money options have a significant value if we incorporate spikes in our modelling, while having a value close to 0 otherwise.