Identification of electricity spot models by using convolution particle filter

We consider a slight perturbation of the Schwartz-Smith model for the electricity futures prices and the resulting modied spot model. Using the martingale property of the modied price under the risk neutral measure, we derive the arbitrage free model for the spot and futures prices. As the futures price formula is based on the arithmetic average of the unobservable spot prices, it is highly nonlinear. We use the particle filtering methodology for estimating the model parameters. The main advantage of the new model is that it avoids the inclusion of articial noise to the observation equation for the implementation of the particle lter. The extra noise is built within the model in an arbitrage free setting.