One of the keys to successfully applying volatility estimation and the stochastic
process is some form of normal (or log-normal) distribution. We cannot assume this
in the energy spot markets. Figure 18.8 shows a typical distribution of spot power
prices. As you can observe prices are leptokurtic rather than normal in nature. This
causes major problems for most of the closed-form models. It is thus necessary to
test continuously for normality assumptions within the energy markets.
The solutions to this are more problematical and are likely to lead to using historic
or ‘adjusted’ historic data within a Monte Carlo simulation model to obtain realistic
representations. Luckily most of the forward markets in energy are much more
‘normal’ in nature than their spot counterparts and are much easier to correct.
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