Multi-agent stochastic simulation for the electricity spot market price

Abstract

The Great Recession of 2008-2009 has dented public confidence in econometrics quite significantly, as few econometric models were able to predict it. Since then, many economists have turned to looking at the psychology of markets in more detail. While some see these events as a sign that economics is an art, rather than a science, multi-agent modelling represents a compromise between these two worlds. In this article, we try to reintroduce stochastic processes to the heart of econometrics, but now equipped with the capability of simulating human emotions. This is done by representing several of Keynes' Animal Spirits with terms in ensemble methods for stochastic differerential equations. These terms are derived from similarities between fluid dynamics and collective market behavior. As our test market, we use the price series of the Nordic electricity spot market Nordpool. © Springer-Verlag Berlin Heidelberg 2011.