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Why do electricity prices jump? Empirical evidence from the Nordic electricity market

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  • Hellström, Jörgen
  • Lundgren, Jens
  • Yu, Haishan
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    Abstract

    The paper empirically explores the possible causes behind electricity price jumps in the Nordic electricity market, Nord Pool. A time-series model (a mixed GARCH–EARJI jump model) capturing the common statistical features of electricity prices is used to identify price jumps. By the model, a categorical variable is defined distinguishing no, positive and negative jumps. The causes for the jumps are then explored through the use of ordered probit models in a second stage. The empirical results indicate that the structure of the market plays an important role in whether shocks in the demand and supply for electricity translate into price jumps.

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    Bibliographic Info

    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 6 ()
    Pages: 1774-1781

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    Handle: RePEc:eee:eneeco:v:34:y:2012:i:6:p:1774-1781

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

    Related research

    Keywords: Electricity price; Price jumps;

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    References

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    1. Jean-Daniel Saphores & Lynda Khalaf & Denis Pelletier, 2002. "On Jumps and ARCH Effects in Natural Resource Prices: An Application to Pacific Northwest Stumpage Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(2), pages 387-400.
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    3. Huisman, R. & Mahieu, R.J., 2001. "Regime Jumps in Electricity Prices," ERIM Report Series Research in Management ERS-2001-48-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
    4. Chan, Wing H & Maheu, John M, 2002. "Conditional Jump Dynamics in Stock Market Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 377-89, July.
    5. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    6. Vlaar, Peter J G & Palm, Franz C, 1993. "The Message in Weekly Exchange Rates in the European Monetary System: Mean Reversion, Conditional Heteroscedasticity, and Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 351-60, July.
    7. Nieuwland, Frederick G M C & Verschoor, Willem F C & Wolff, Christian C P, 1994. "Stochastic trends and jumps in EMS exchange rates," Journal of International Money and Finance, Elsevier, vol. 13(6), pages 699-727, December.
    8. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September.
    9. Philippe Jorion, 1988. "On Jump Processes in the Foreign Exchange and Stock Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 427-445.
    10. Guthrie, Graeme & Videbeck, Steen, 2007. "Electricity spot price dynamics: Beyond financial models," Energy Policy, Elsevier, vol. 35(11), pages 5614-5621, November.
    11. John M. Maheu & Thomas H. McCurdy, 2004. "News Arrival, Jump Dynamics, and Volatility Components for Individual Stock Returns," Journal of Finance, American Finance Association, vol. 59(2), pages 755-793, 04.
    12. Bystrom, Hans N. E., 2005. "Extreme value theory and extremely large electricity price changes," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 41-55.
    13. Hjalmarsson, Erik, 2000. "Nord Pool: A Power Market Without Market Power," Working Papers in Economics 28, University of Gothenburg, Department of Economics.
    14. Lundgren, Jens & Hellström, Jörgen & Rudholm, Niklas, 2008. "Multinational Electricity Market Integration and Electricity Price Dynamics," HUI Working Papers 16, HUI Research.
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    Cited by:
    1. HFrance Krizanic & Zan Jan Oplotnik, 2013. "Market Changes, Business Cycles and Fluctuations in Electricity Prices - EU Evidence from Germany and Slovenia," International Journal of Energy Economics and Policy, Econjournals, vol. 3(2), pages 118-126.

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