Comparison of oil and electricity spot prices using ensemble coupled mean reversion model

In this work, the dynamics of oil and electricity spot prices are studied using the mathematical model which comprises of the ideal of ensemble modelling called the ensemble coupled mean reversion model. The ensemble coupled mean reversion model is used to simulate oil and electricity data series by the use of MATLAB software. Model parameters are calibrated by Least Square method and Euler scheme of half order is used to approximate the values of simulation. The real and simulated are compared in form of figures and statistical values. Observation shows that the ensemble coupled mean reversion model is capable of playing with the dynamics of all real prices well since simulated prices show similar behaviour to the real prices as displayed in plots and statistics of the data. The mean reversion rate for oil prices is observed to be less compared to that of electricity prices. This is due to the fact that electricity can not be stored and its prices is regulated by the market condition. Oil can be stored and the prices change takes long time to get back to its equilibrium position. For further studies of the dynamics of these prices, we recommend the simulation to be done by using more improved scheme of higher order like Heun, Runge-Kutta or other scheme for more improved results. Also some improvement in parameter estimation are required especially for oil prices since simulated prices fail to replicate to some extent the dynamics of real prices.