Modelling dependence of price spikes in Australian electricity markets

Price spikes are of particular importance due to their severe impacts on consumers, businesses and industry. They constitute a major source of risk to market participants - for example, electricity retailers with commitments to meet customers' daily electricity demands. To those trading in several electricity markets simultaneously, the probability of simultaneous price spikes (termed as tail dependence) is of great importance when computing risks. For this purpose, the problem of modelling joint price spikes in the Australian electricity market is considered. A common measure of tail-dependence is the so-called tail dependence coefficient. We present a nonparametric estimator of the tail dependence and further, the point estimation is complemented with a hypothesis test. We find significant tail dependence in electricity prices that cannot be ignored. Accurate characterisation of this tail dependence is important for a variety of risk management purposes. These include the hedging activities of market participants