Extreme value theory for heavy tails in electricity prices

Abstract

Typical characteristics of electricity day-ahead prices at EPEX are the very high volatility and a large number of extreme price changes. In this paper, we look at hourly spot prices at the German electricity market and apply extreme value theory (EVT) to investigate the tails of the price change distribution. Our results show the importance of delimiting price spikes and modeling them separately from the core of the price distribution. In particular, we get a realistic fit of the generalized Pareto distribution (GPD) to AR-GARCH filtered price change series, and based on this model accurate forecasts of extreme price quantiles are obtained. Generally, our results suggest EVT to be of interest for both risk managers and portfolio managers in the highly volatile electricity market.