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Efficient estimation of Markov regime-switching models: An application to electricity spot prices

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  • Joanna Janczura

    ()

  • Rafał Weron

    ()

Abstract

In this paper we discuss the calibration of models built on mean-reverting processes combined with Markov regime-switching (MRS). We propose a method that greatly reduces the computational burden induced by the introduction of independent regimes and perform a simulation study to test its efficiency. Our method allows for a 100 to over 1000 times faster calibration than in case of a competing approach utilizing probabilities of the last 10 observations. It is also more general and admits any value of γ in the base regime dynamics. Since the motivation for this research comes from a recent stream of literature in energy economics, we apply the new method to sample series of electricity spot prices from the German EEX and Australian NSW markets. The proposed MRS models fit these datasets well and replicate the major stylized facts of electricity spot price dynamics. Copyright The Author(s) 2012

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File URL: http://hdl.handle.net/10.1007/s10182-011-0181-2
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Bibliographic Info

Article provided by Springer in its journal AStA Advances in Statistical Analysis.

Volume (Year): 96 (2012)
Issue (Month): 3 (July)
Pages: 385-407

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Handle: RePEc:spr:alstar:v:96:y:2012:i:3:p:385-407

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Related research

Keywords: Markov regime-switching; Energy economics; Electricity spot price; EM algorithm; Independent regimes;

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References

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Citations

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Cited by:
  1. Malika Hamadi & Andreas Heinen, 2011. "Ownership Structure and Firm Performance : Evidence from a non-parametric panel," CREA Discussion Paper Series 11-16, Center for Research in Economic Analysis, University of Luxembourg.
  2. Janczura, Joanna & Trück, Stefan & Weron, Rafał & Wolff, Rodney C., 2013. "Identifying spikes and seasonal components in electricity spot price data: A guide to robust modeling," Energy Economics, Elsevier, vol. 38(C), pages 96-110.
  3. Eichler Michael & Tuerk Dennis, 2012. "Fitting semiparametric Markov regime-switching models to electricity spot prices," Research Memorandum 036, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  4. Joanna Janczura, 2014. "Pricing electricity derivatives within a Markov regime-switching model: a risk premium approach," Computational Statistics, Springer, vol. 79(1), pages 1-30, February.
  5. Nowotarski, Jakub & Tomczyk, Jakub & Weron, Rafal, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," MPRA Paper 42563, University Library of Munich, Germany.
  6. Janczura, Joanna & Weron, Rafal, 2010. "Goodness-of-fit testing for regime-switching models," MPRA Paper 22871, University Library of Munich, Germany.
  7. Goutte, Stéphane, 2014. "Conditional Markov regime switching model applied to economic modelling," Economic Modelling, Elsevier, vol. 38(C), pages 258-269.
  8. Joanna Janczura & Rafał Weron, 2013. "Goodness-of-fit testing for the marginal distribution of regime-switching models with an application to electricity spot prices," AStA Advances in Statistical Analysis, Springer, vol. 97(3), pages 239-270, July.
  9. Joanna Janczura, 2012. "Pricing electricity derivatives within a Markov regime-switching model," Papers 1203.5442, arXiv.org.
  10. Erik Lindström & Fredric Regland, 2012. "Independent Spike Models: Estimation and Validation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(2), pages 180-196, May.
  11. Joanna Janczura & Rafal Weron, 2012. "Inference for Markov-regime switching models of electricity spot prices," HSC Research Reports HSC/12/01, Hugo Steinhaus Center, Wroclaw University of Technology.
  12. Stéphane Goutte & Benteng Zou, 2012. "Continuous time regime switching model applied to foreign exchange rate," Working Papers hal-00643900, HAL.
  13. Arvesen, Øystein & Medbø, Vegard & Fleten, Stein-Erik & Tomasgard, Asgeir & Westgaard, Sjur, 2012. "Linepack storage valuation under price uncertainty," MPRA Paper 43270, University Library of Munich, Germany.
  14. Stéphane Goutte, 2012. "Conditional Markov regime switching model applied to economic modelling," Working Papers hal-00747479, HAL.
  15. Lindström, Erik & Regland, Fredrik, 2012. "Modeling extreme dependence between European electricity markets," Energy Economics, Elsevier, vol. 34(4), pages 899-904.

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