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An empirical comparison of alternate regime-switching models for electricity spot prices

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  • Janczura, Joanna
  • Weron, Rafal

Abstract

One of the most profound features of electricity spot prices are the price spikes. Markov regime-switching (MRS) models seem to be a natural candidate for modeling this spiky behavior. However, in the studies published so far, the goodness-of-fit of the proposed models has not been a major focus. While most of the models were elegant, their fit to empirical data has either been not examined thoroughly or the signs of a bad fit ignored. With this paper we want to fill the gap. We calibrate and test a range of MRS models in an attempt to find parsimonious specifications that not only address the main characteristics of electricity prices but are statistically sound as well. We find that the best structure is that of an independent spike 3-regime model with time-varying transition probabilities, heteroscedastic diffusion-type base regime dynamics and shifted spike regime distributions. Not only does it allow for a seasonal spike intensity throughout the year and consecutive spikes or price drops, which is consistent with market observations, but also exhibits the 'inverse leverage effect' reported in the literature for spot electricity prices.

Suggested Citation

  • Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models for electricity spot prices," Energy Economics, Elsevier, vol. 32(5), pages 1059-1073, September.
    • Handle: RePEc:eee:eneeco:v:32:y:2010:i:5:p:1059-1073
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    More about this item

    Keywords

    Electricity spot price Spikes Markov regime-switching Heteroscedasticity Inverse leverage effect;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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