Geometry of markets : How to reproduce New Zealand market covariances in the JCM simulation model?

Abstract

In this research, we tried to investigate how the New Zealand electricity market covariances can be reproduced using a stochastic system of differential equations, namely the JCM model. The methods, employed in this study to analyze the data, are correlation analysis and distance covariance. Using Matlab, the data used to carry out simulations were taken from New Zealand Electricity Authority website, dating from 1 January 1999 to 31 March 2009. The research findings have shown that the JCM model was able to reproduce some of the New Zealand electricity market covariances, as the model identified a number of strong relationships between nodes. It was also able to reproduce the fact that the South Island nodes are less correlated between them in contrast to the South Island nodes which have strong correlations between them. In short, the model can explain the New Zealand market covariances to certain extent. The results also brought an other important property, symmetricity of correlation coefficient, which the JCM model failed to verify yet it was easily verified in the original data.