A regime switching long memory model for electricity prices
AbstractIn this paper we develop a regime switching model which can generate long memory (fractional integration) in each of the regime states. This property is relevant in a number of cases. For instance, the deregulated market for electricity power in the Nordic countries is characterized by electricity spot prices with a high degree of long memory. It occurs that in some time periods bilateral prices are identical whereas in other periods the prices differ. The latter occurs when a capacity congestion exists across regions and multiple price areas will result. If the price series are fractionally integrated this means that in some regimes, an extreme form of fractional cointegration amongst prices will exist. We define a Markov switching fractional integration model from which the fractional orders of integration in separate states can be estimated using Maximum Likelihood techniques. The model is adapted to data for the Nordic electricity spot market, and we find that regime swithing and long memory are empirically relevant to co-exist. In particular, we find that the price behaviour for single markets can be very different depending upon the presence or absence of bottlenecks in electricity transmission. Using Monte Carlo forecasting we find that the regime switching model appears to be especially attractive in forecasting relative prices.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Econometrics.
Volume (Year): 135 (2006)
Issue (Month): 1-2 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconom
Other versions of this item:
- Niels Haldrup & Morten O. Nielsen, 2004. "A Regime Switching Long Memory Model for Electricity Prices," Economics Working Papers 2004-2, School of Economics and Management, University of Aarhus.
- C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nielsen, Morten rregaard, 2004.
"Efficient Likelihood Inference In Nonstationary Univariate Models,"
Cambridge University Press, vol. 20(01), pages 116-146, February.
- Morten Oe. Nielsen, . "Efficient Likelihold Inference in Nonstationary Univariate Models," Economics Working Papers 2001-8, School of Economics and Management, University of Aarhus.
- Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
- Natalia Fabra & Juan Toro, 2001.
"Price Wars and Collusion in the Spanish Electricity Market,"
Economic Working Papers at Centro de Estudios Andaluces
E2001/05, Centro de Estudios Andaluces.
- Fabra, Natalia & Toro, Juan, 2005. "Price wars and collusion in the Spanish electricity market," International Journal of Industrial Organization, Elsevier, vol. 23(3-4), pages 155-181, April.
- Natalia Fabra & Juan Toro, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Industrial Organization 0212001, EconWPA, revised 31 Aug 2003.
- Juan Toro & Natalia Fabra, 2002. "Price Wars and Collusion in the Spanish Electricity Market," Economics Series Working Papers 136, University of Oxford, Department of Economics.
- Haldrup, Niels & Nielsen, Morten Oe., .
"Estimation of Fractional Integration in the Presence of Data Noise,"
Economics Working Papers
2003-10, School of Economics and Management, University of Aarhus.
- Haldrup, Niels & Nielsen, Morten Orregaard, 2007. "Estimation of fractional integration in the presence of data noise," Computational Statistics & Data Analysis, Elsevier, vol. 51(6), pages 3100-3114, March.
- Kleindorfer, Paul R & Fernando, Chitru S, 1993. "Peak-Load Pricing and Reliability under Uncertainty," Journal of Regulatory Economics, Springer, vol. 5(1), pages 5-23, March.
- Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, January.
- Francis X. Diebold & Atsushi Inoue, 2000.
"Long Memory and Regime Switching,"
NBER Technical Working Papers
0264, National Bureau of Economic Research, Inc.
- Ramanathan, Ramu & Engle, Robert & Granger, Clive W. J. & Vahid-Araghi, Farshid & Brace, Casey, 1997. "Shorte-run forecasts of electricity loads and peaks," International Journal of Forecasting, Elsevier, vol. 13(2), pages 161-174, June.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990.
"Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?,"
8905, Michigan State - Econometrics and Economic Theory.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- Phillips, Peter C. B. & Jin, Sainan, 2002.
"The KPSS test with seasonal dummies,"
Elsevier, vol. 77(2), pages 239-243, October.
- Granger, Clive W.J. & Hyung, Namwon, 1999.
"Occasional Structural Breaks and Long Memory,"
University of California at San Diego, Economics Working Paper Series
qt4d60t4jh, Department of Economics, UC San Diego.
- Tanaka, Katsuto, 1999. "The Nonstationary Fractional Unit Root," Econometric Theory, Cambridge University Press, vol. 15(04), pages 549-582, August.
- Hansen, Bruce E. & Seo, Byeongseon, 2002.
"Testing for two-regime threshold cointegration in vector error-correction models,"
Journal of Econometrics,
Elsevier, vol. 110(2), pages 293-318, October.
- Tom Doan, . "RATS programs to replicate Hansen/Seo paper on threshold cointegration," Statistical Software Components RTZ00092, Boston College Department of Economics.
- Crew, Michael A & Fernando, Chitru S & Kleindorfer, Paul R, 1995. "The Theory of Peak-Load Pricing: A Survey," Journal of Regulatory Economics, Springer, vol. 8(3), pages 215-48, November.
- Franses, Ph.H.B.F. & Ooms, M. & Bos, C.S., 1998.
"Long memory and level shifts: re-analysing inflation rates,"
Econometric Institute Research Papers
EI 9811, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Philip Hans Franses & Marius Ooms & Charles S. Bos, 1999. "Long memory and level shifts: Re-analyzing inflation rates," Empirical Economics, Springer, vol. 24(3), pages 427-449.
- Charles S. Bos & Philip Hans Franses & Marius Ooms, 1998. "Long Memory and Level Shifts: Re-Analyzing Inflation Rates," Tinbergen Institute Discussion Papers 98-039/4, Tinbergen Institute.
- Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
- Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011.
"Modelling Electricity Prices: International Evidence,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
- Alvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía.
- M. Angeles Carnero & Siem Jan Koopman & Marius Ooms, 2003.
"Periodic Heteroskedastic RegARFIMA Models for Daily Electricity Spot Prices,"
Tinbergen Institute Discussion Papers
03-071/4, Tinbergen Institute.
- Marius Ooms & M. Angeles Carnero & Siem Jan Koopman, 2004. "Periodic Heteroskedastic RegARFIMA models for daily electricity spot prices," Econometric Society 2004 Australasian Meetings 158, Econometric Society.
- Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
- Sherman,Roger, 1989. "The Regulation of Monopoly," Cambridge Books, Cambridge University Press, number 9780521368629, December.
- Peter C.B. Phillips, 1985.
"Time Series Regression with a Unit Root,"
Cowles Foundation Discussion Papers
740R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1986.
- Hans-Martin Krolzig & Massimiliano Marcellino & Grayham E. Mizon, .
"A Markov-Switching Vector Equilibrium Correction Model of the UK Labour Market,"
185, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Massimiliano Marcellino & Grayham E. Mizon & Hans-Martin Krolzig, 2002. "A Markov-switching vector equilibrium correction model of the UK labour market," Empirical Economics, Springer, vol. 27(2), pages 233-254.
- Krolzig, Hans-Martin & Marcellino, Massimiliano & Mizon, Grayham E., 2000. "A Markov-switching vector equilibrium correction model of the UK labour market," Discussion Paper Series In Economics And Econometrics 0105, Economics Division, School of Social Sciences, University of Southampton.
- Motta,Massimo, 2004. "Competition Policy," Cambridge Books, Cambridge University Press, number 9780521016919, December.
- Davidson, James, 2004. "Forecasting Markov-switching dynamic, conditionally heteroscedastic processes," Statistics & Probability Letters, Elsevier, vol. 68(2), pages 137-147, June.
- Granger, C. W. J., 1981. "Some properties of time series data and their use in econometric model specification," Journal of Econometrics, Elsevier, vol. 16(1), pages 121-130, May.
- Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
- Lee, D. & Schmidt, P., 1993.
"On the Power of the KPSS Test of Stationarity Against Fractionally-Integrated Alternatives,"
9111, Michigan State - Econometrics and Economic Theory.
- Lee, Dongin & Schmidt, Peter, 1996. "On the power of the KPSS test of stationarity against fractionally-integrated alternatives," Journal of Econometrics, Elsevier, vol. 73(1), pages 285-302, July.
- Granger, Clive W. J. & Ding, Zhuanxin, 1996. "Varieties of long memory models," Journal of Econometrics, Elsevier, vol. 73(1), pages 61-77, July.
- Engle, R. F. & Granger, C. W. J. & Hallman, J. J., 1989. "Merging short-and long-run forecasts : An application of seasonal cointegration to monthly electricity sales forecasting," Journal of Econometrics, Elsevier, vol. 40(1), pages 45-62, January.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.