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Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility

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  • Heydari, Somayeh
  • Siddiqui, Afzal
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    Abstract

    Energy 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 Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 32 (2010)
    Issue (Month): 3 (May)
    Pages: 709-725

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    Handle: RePEc:eee:eneeco:v:32:y:2010:i:3:p:709-725

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    Web page: http://www.elsevier.com/locate/eneco

    Related research

    Keywords: Energy spot prices Hamilton filter Markov regime switching Stochastic volatility Variogram;

    References

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