Factor models in the German electricity market: Stylized facts, seasonality, and calibration

The class of arithmetic factor models is flexible enough to model all stylized facts occurring in electricity markets, including negative prices, while still yielding tractable derivative prices. In this paper we conduct a thorough review of the requirements and possibilities of factor models. We compare different seasonality functions and study their power to deseasonalise day-ahead spot prices from the EPEX Germany/Austria market. Furthermore, we introduce an alternative method to estimate mean reversion speed based on ARMA time series and a method to evaluate the distributional fit of the model to realised market prices, which we apply to two non-Gaussian estimated models.