Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility
AbstractEnergy prices are often highly volatile with unexpected spikes. Capturing these sudden spikes may lead to more informed decision-making in energy investments, such as valuing gas-fired power plants, than ignoring them. In this paper, non-linear regime-switching models and models with mean-reverting stochastic volatility are compared with ordinary linear models. The study is performed using UK electricity and natural gas daily spot prices and suggests that with the aim of valuing a gas-fired power plant with and without operational flexibility, non-linear models with stochastic volatility, specifically for logarithms of electricity prices, provide better out-of-sample forecasts than both linear models and regime-switching models.
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Bibliographic InfoArticle provided by Elsevier in its journal Energy Economics.
Volume (Year): 32 (2010)
Issue (Month): 3 (May)
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Web page: http://www.elsevier.com/locate/eneco
Energy spot prices Hamilton filter Markov regime switching Stochastic volatility Variogram;
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