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Decomposing electricity prices with jumps

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  • Eduardo Martínez Chombo

    (Banco de México)

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    Abstract

    We propose a model that decomposes electricity prices into two independent stochastic processes: one that represents the “normal” pattern of electricity prices and other that captures temporary shocks, or “jumps”, with non-lasting effects in the market. Each contains specific mean reverting parameters to estimate. In order to identify such components we specify a state-space model with regime switching and apply the Kim's (1994) filtering algorithm to estimate the model for the mean adjusted series of New South Wales' electricity prices. Finally, bootstrap simulations were performed to estimate the expected contribution of each of the components in the overall electricity prices.

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    File URL: http://codex.colmex.mx:8991/exlibris/aleph/a18_1/apache_media/S1EL19I6R3KL981KQ1ATVDJV9FYYAT.pdf
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    Bibliographic Info

    Article provided by El Colegio de México, Centro de Estudios Económicos in its journal Estudios Económicos.

    Volume (Year): 20 (2005)
    Issue (Month): 1 ()
    Pages: 27-52

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    Handle: RePEc:emx:esteco:v:20:y:2005:i:1:p:27-52

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    Web page: http://www.colmex.mx/centros/cee/
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    1. S. James Press, 1967. "A Compound Events Model for Security Prices," The Journal of Business, University of Chicago Press, vol. 40, pages 317.
    2. Byström, Hans, 2001. "Extreme Value Theory and Extremely Large Electricity Price Changes," Working Papers 2001:19, Lund University, Department of Economics.
    3. Huisman, R. & Mahieu, R.J., 2003. "Regime jumps in electricity prices," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3131736, Tilburg University.
    4. Kim, C-J., 1991. "Dynamic Linear Models with Markov-Switching," Papers 91-8, York (Canada) - Department of Economics.
    5. Lucia, Julio J. & Schwartz, Eduardo, 2000. "Electricity prices and power derivatives: Evidence from the Nordic Power Exchange," University of California at Los Angeles, Anderson Graduate School of Management qt12w8v7jj, Anderson Graduate School of Management, UCLA.
    6. Alvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía.
    7. Ball, Clifford A & Torous, Walter N, 1985. " On Jumps in Common Stock Prices and Their Impact on Call Option Pricing," Journal of Finance, American Finance Association, vol. 40(1), pages 155-73, March.
    8. Ángel León & Antonio Rubia, 2001. "Comportamiento Del Precio Y Volatilidad En El Pool Eléctrico Español," Working Papers. Serie EC 2001-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    9. De Vany, Arthur S. & Walls, W. David, 1999. "Cointegration analysis of spot electricity prices: insights on transmission efficiency in the western US," Energy Economics, Elsevier, vol. 21(5), pages 435-448, October.
    10. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    11. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
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