Multi-agent stochastic simulation for the electricity spot market price

After the Great Recession of 2008-2009, many mathematical and econometric models used in economy have received a lot of criticism, since they were not able to predict the emergence of the asset bubble in the U. S. housing market. As a result of this, econometricians have increasingly turned towards seeking explanations to what happened in the psychological element in market traders’ actions. This has repeatedly brought up the idea of emotions that influence human economic behavior. These emotions are also known as animal spirits and were originally introduced by John Maynard Keynes in his 1936 book [9]. Not only global economic upheavals display such behavior. A different type of extreme event can be observed in deregulated electricity spot markets which are known to be one of the most volatile financial markets. This distinctive phenomenon is the appearance of price spikes, i.e. sudden price changes to values up to dozens of times higher within only an hour, and again falling back to the previous level within a couple of hours or days. After each spike, market specialists are able to find a reason that caused it in hindsight. But few of those reasons are reliable predictors for future spikes [2]. Nor has any econometric model shown any skill in forecasting those sudden price changes. In the current study, we investigate the possible origin of price spikes in animal spirits that rule the behavior of all traders. Our modelling attempt of electricity spot markets is not directly based on any notion of intelligent – if emotional – agents. Instead, we have sought to equip classical Ornstein-Uhlenbeck type mean-reverting econometric models with new non-linear terms that emulate the impact of a distinct animal spirit each. Although the motivation for these models is not grounded in the psychology of intelligent agents, they display very similar behavior to that of models based on intelligent agents – or the real price history of electricity on the Nord Pool Spot market, the largest electricity spot market in the world.