Modelling the distribution of day-ahead electricity returns: a comparison

This paper contributes to characterizing the probability density of the price returns in some European day-ahead electricity markets (NordPool, APX, Powernext) by fitting some flexible and general families of distributions, such as the alpha-stable, Normal Inverse Gaussian (NIG), Exponential Power (EP), and Asymmetric Exponential Power (AEP), and comparing their goodness of fit. The alpha-stable and the NIG systematically outperform the EP and AEP models, but the tail behaviours and the skewness are sensitive to the definition of returns and to the deseasonalization methods. In particular, the logarithmic transform and volatility rescaling tend to dampen the extreme returns.Electricity prices, alpha-stable, Normal Inverse Gaussian, Exponential Power,Asymmetric Exponential Power, goodness-of-fit

Volatility-price relationships in power exchanges: A demand-supply analysis

The evidence of volatility-price dependence observed in previous works (Karakatsani and Bunn 2004; Bottazzi, Sapio and Secchi 2005; Simonsen 2005) suggests that there is more to volatility than simply spikes. Volatility is found to be positively correlated with the lagged price level in settings where market power is likely to be particularly strong (UK on-peak sessions, the CalPX). Negative correlation is instead observed in markets considered to be fairly competitive, such as the NordPool. Prompted by these observations, this paper aims to understand whether volatility-price patterns can be mapped into different degrees of market competition, as the evidence seems to suggest. Price fluctuations are modelled as outcomes of dynamics in both sides of the market - demand and supply, which in turn respond to shocks to the underlying preference and technology fundamentals. Negative volatility-price dependence arises if the market dynamics is accounted for by common shocks which affect valuations uniformly. Positive dependence is related to the impact of asymmetric shocks. The paper shows that under certain conditions, these volatility-price patterns can be used to identify the exercise of market power. Identification is however ruled out if all shocks affect valuations uniformly.Electricity, Market, Volatility, Supply Curve, Demand Curve, Fundamentals, Shocks

Market Design, Bidding Rules, and Long Memory in Electricity Prices

In uniform price, sealed-bid day-ahead electricity auctions, the market price is set at the intersection between aggregate demand and supply functions built by a market operator. Each day, just one agent - the marginal generator - owns the market-clearing plant. Day-ahead auctions are moreover embedded in multi-segment systems, wherein diverse protocols coexist and change over time. Such a complex environment leads to adoption of simple, adaptive bidding rules. Specifically, such a market design lets two different types of routines emerge, depending on whether the agent is a likely marginal or inframarginal generator. However, because of the uniform price mechanism, only the bidding behavior of the former can be reflected into market prices. Depending on the specific way marginal generators process past information to set their bids - 'hyperbolic' or 'exponential' - electricity prices are likely to display long- or short-memory. Experimental evidence on hyperbolic discounting - a quite robust behavioral bias in humans - supports a long-memory view of electricity prices. This insight is broadly confirmed by spectral analysis of daily data from NordPool and CalPX markets, in sharp contrast with most previous empirical studies. This paper underlines the importance of institutional settings in determining market outcomes, and an interesting mapping of bidding rules and models of information processing into the time series properties of market prices.Market Design, Electricity Markets, Hyperbolic Discounting, Long Memory, Fractional Processes

An Empirically Based Model of the Supply Schedule in Day-Ahead Electricity Markets

The first part of this paper establishes some new pieces of evidence on the dynamics of prices and volumes in wholesale electricity day-ahead markets (NordPool, APX, Powernext). The growth of prices is more strongly autocorrelated than the growth of volumes; it is more more heavy-tailed; and its conditional standard deviation decays like the reciprocal of the price level (1/P scaling). In the second part of the paper, it is shown that a linear supply function with stochastic intercept and constant slope suffices to explain the 1/P scaling. Furthermore, this model allows to decompose price fluctuations in an exogenous demand effect and a strategically-driven supply effect. In light of this model, the heavier tails of price growth and its stronger autocorrelation structure are due to persistent and intermittent strategic moves by suppliers, related to expected demand growth.Electricity Markets, Supply Curve, Subbotin Distribution, Fat Tails, Scaling, Demand Effect, Supply Effect.

The impact of forward trading on the spot power price volatility with Cournot competition

In this paper, we analyze the influence of forward trading on the volatility of spot power prices, in models where forward contracts are strategic tools used by energy producers to obtain profit security. We define volatility as the variance of the percentage change in spot power prices over a given time interval. As shown in Sapio (2008), volatility is related to stochastic fluctuations in preference and technology fundamentals, and is tuned by the price-elasticity of demand and supply, evaluated at equilibrium. We study two cases. First, we analyze the volatility implications of a model wherein the amount of forward trading is fixed, and producers compete a la Cournot. Fixed forward trading increases spot volatility, because forwards lower the spot price level, corresponding to a less elastic region of a linear demand function. However, if the amount of forward trading is endogenous, as in the two-stage model of Allaz (1992), producers can anticipate the spot market impact of stochastic shocks on fundamentals and 'sterilize' them. As a result, spot price volatility is closer to the value implied by an efficient market. Our theoretical results are illustrated by means of a simple simulation study.Electricity market; Cournot model; forward contract; volatility of spot price; elasticity;

An Essay on the Emergence, Organization and Performance of Financial Markets: the case of the Alternative Investment Market

This work provides an overview of the historical evolution, the organizational forms, and the performances of the stock exchanges and market segments catering to small and growing companies, set up in Europe in the last thirty years. We mainly focus on the Alternative Investment Market (AIM), created by the London Stock Exchange in 1995. This case study yields useful insights about the role of public and private interests in market emergence and in shaping market architectures, the costs and benefits of light stock market regulation, and the use of stock markets to support technology-based small firms. A review of the existing empirical evidence shows that dimensional growth of the AIM has been fueled by companies characterized by low values of long-term returns, growth rates, R&D productivity and solvency.Public equity, Market emergence, Market design, Alternative Investment Market, High-tech, Small firms

The Growth of Industrial Sectors: Theoretical Insights and Empirical Evidence from U.S. Manufacturing

In this paper, we study the growth rates of 4-digit sectors in U.S. manufacturing. Two measures of size (value of shipments, value added) are considered, for each of the 38 years (1959-1996) of a sample of 458 4-digit sectors, drawn from the NBER Manufacturing Productivity database. Whole sample results are partly in line with firm growth facts: (i) sectoral growth rates are distributed according to heavy-tailed Subbotin distributions, with shape coefficient between 1.0 (Laplace) and 1.5; (ii) the volatility of growth rates is decreasing with respect to size, with a scaling exponent varying over time, but always between -0.20 and -0.10. Preliminary analyses on more homogeneous groups cast doubts on the evidence of scaling, but leave basically unaffected the distributional properties of sectoral growth. These results shed light on the role of inter-firm correlations, market concentration, and positive intersectoral feedbacks as drivers of meso-economic dynamics.Sectoral Growth, Subbotin Distribution, Scaling, U.S. Manufacturing

Integrating body scanning solutions into virtual dressing rooms

The world is entering its 4th Industrial Revolution, a new era of manufacturing characterized by ubiquitous digitization and computing. One industry to benefit and grow from this revolution is the fashion industry, in which Europe (and Italy in particular) has long maintained a global lead. To evolve with the changes in technology, we developed the IT- SHIRT project. In the context of this project, a key challenge relies on developing a virtual dressing room in which the final users (customers) can virtually try different clothes on their bodies. In this paper, we tackle the aforementioned issue by providing a critical analysis of the existing body scanning solutions, identifying their strengths and weaknesses towards their integration within the pipeline of virtual dressing rooms

How does market architecture affect price dynamics ? A time series analysis of the Italian day-ahead electricity prices

How do changes in the market architecture affect the dynamics of deregulated electricity prices? We investigate this issue in the context of the Italian Power Exchange (IPEX), using data on the daily average day-ahead price (PUN) between April 2004 and December 2008. Estimates of baseline time series models (ARMAX and ARMAX-EGARCH) and their forecasting performances suggest that the trend in natural gas prices, deterministic weekly patterns, the impact of perceived temperatures, persistence in conditional volatility and the inverse leverage effect are essential features of the PUN dynamics. We then augment the best-performing models with dummies that account for changes in the market architecture, such as the introduction of contracts for differences (CfDs) to support renewables, trading of white certificates for energy efficiency, and the demandside liberalization. The findings show that changes in the market architecture have only affected the PUN volatility. Specifically, CfDs have mitigated volatility, while white certificates and demand liberalization have increased it. Moreover, after controlling for reforms the inverse leverage effect vanishes, and the persistence in volatility is lower than in the baseline estimates.electricity prices, Italian power exchange, market architecture, ARMA, EGARCH

No PUN intended: A time series analysis of the Italian day-ahead electricity prices

How do changes in the market architecture affect the dynamics of deregulated electricity prices? We investigate this issue in the context of the Italian Power Exchange (IPEX), using data on the daily average day-ahead price (PUN) between April 2004 and December 2008. Estimates of baseline time series models (ARMAX and ARMAX-EGARCH) and their forecasting performances suggest that the trend in natural gas prices, deterministic weekly patterns, the impact of perceived temperatures, persistence in conditional volatility and the inverse leverage effect are essential features of the PUN dynamics. We then augment the best-performing models with dummies that account for changes in the market architecture, such as the introduction of contracts for differences (CfDs) to support renewables, trading of white certificates for energy efficiency, and the demandside liberalization. The findings show that changes in the market architecture have only affected the PUN volatility. Specifically, CfDs have mitigated volatility, while white certificates and demand liberalization have increased it. Moreover, after controlling for reforms the inverse leverage effect vanishes, and the persistence in volatility is lower than in the baseline estimates.Electricity prices, Italian Power Exchange, Market architecture, ARMA,EGARCH