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Regime Jumps in Electricity Prices

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Author Info
Huisman, R.
Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)

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Abstract

Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.

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Publisher Info
Paper provided by 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 University Rotterdam. in its series Research Paper with number ERS-2001-48-F&A Revision_Date: 2009-07-29.

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Date of creation: 15 Aug 2001
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Handle: RePEc:dgr:eureri:2001107

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Related research
Keywords: electricity prices; jumps; stochastic models; international energy markets; mean reversion;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alexander Boogert & Dominique Dupont, 2007. "When Supply Meets Demand: The Case of Hourly Spot Electricity Prices," Birkbeck Working Papers in Economics and Finance 0707, Birkbeck, Department of Economics, Mathematics & Statistics. [Downloadable!]
  2. Silvana Musti & Viviana Fanelli, 2008. "Modelling electricity forward curve dynamics in the Italian market," Quaderni DSEMS 20-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia. [Downloadable!]
  3. Rafal Weron & Adam Misiorek, 2005. "Forecasting Spot Electricity Prices With Time Series Models," Econometrics 0504001, EconWPA. [Downloadable!]
  4. Huisman, R. & Huurman, C. & Mahieu, R.J., 2007. "Hourly Electricity Prices in Day-Ahead Markets," Research Paper ERS-2007-002-F&A Revision, 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. [Downloadable!]
    Other versions:
  5. Matteo Manera & Massimiliano Serati & Michele Plotegher, 2008. "Modeling Electricity Prices: From the State of the Art to a Draft of a New Proposal," Working Papers 2008.9, Fondazione Eni Enrico Mattei. [Downloadable!]
    Other versions:
  6. repec:mop:credwp:08.09.77 is not listed on IDEAS
  7. Georg Zachmann, 2007. "A Markov Switching Model of the Merit Order to Compare British and German Price Formation," Discussion Papers of DIW Berlin 714, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  8. T M Christensen & A S Hurn & K A Lindsay, 2008. "It never rains but it pours: Modelling the persistence of spikes in electricity prices," NCER Working Paper Series 25, National Centre for Econometric Research. [Downloadable!]
  9. Trueck, Stefan & Weron, Rafal & Wolff, Rodney, 2007. "Outlier Treatment and Robust Approaches for Modeling Electricity Spot Prices," MPRA Paper 4711, University Library of Munich, Germany. [Downloadable!]
  10. Rafal Weron, 2005. "Market price of risk implied by Asian-style electricity options," Econometrics 0502003, EconWPA. [Downloadable!]
  11. Weron, Rafal & Misiorek, Adam, 2008. "Forecasting spot electricity prices: A comparison of parametric and semiparametric time series models," MPRA Paper 10428, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  12. Theodore Panagiotidis & Emilie Rutledge, 2004. "Oil and gas market in the UK: evidence from a cointegration approach," Discussion Paper Series 2004_18, Department of Economics, Loughborough University, revised Nov 2004. [Downloadable!]
  13. Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics 0502005, EconWPA. [Downloadable!]
  14. Lundgren, Jens & Hellström, Jörgen & Rudholm, Niklas, 2008. "Multinational Electricity Market Integration and Electricity Price Dynamics," HUI Working Papers 16, The Swedish Retail Institute (HUI). [Downloadable!]
  15. Eduardo Martínez Chombo, 2005. "Decomposing electricity prices with jumps," Estudios Económicos, El Colegio de México, Centro de Estudios Económicos, vol. 20(1), pages 27-52. [Downloadable!]
  16. Huisman, R. & Mahieu, R.J. & Schlichter, F., 2007. "Electricity Portfolio Management: Optimal Peak / Off-Peak Allocations," Research Paper ERS-2007-089-F&A Revision, 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. [Downloadable!]
    Other versions:
  17. Jan Seifert & Marliese Uhrig-Homburg, 2007. "Modelling jumps in electricity prices: theory and empirical evidence," Review of Derivatives Research, Springer, vol. 10(1), pages 59-85, January. [Downloadable!] (restricted)
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