The Stability and Volatility of Electricity Prices: An Illustration of (λ, σ²) Analysis

Abstract

The aim of this letter is to discuss and illustrate what we call (λ, σ²)- analysis, which is a method to distinguish between the stability of a stochastic dynamic system and the volatility of a variable generated by this system. It is also emphasized that this method is able to generate new research questions for economic theory. The data set used in an empirical illustration is spot electricity prices from Nord Pool.