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Heavy-tails and regime-switching in electricity prices

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  • Weron, Rafal

Abstract

In this paper we first analyze the stylized facts of electricity prices, in particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of price changes. Then we calibrate Markov regime-switching (MRS) models with heavy-tailed components and show that they adequately address the aforementioned characteristics. Contrary to the common belief that electricity price models ‘should be built on log-prices’, we find evidence that modeling the prices themselves is more beneficial and methodologically sound, at least in case of MRS models.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10424.

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Date of creation: 09 May 2008
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Handle: RePEc:pra:mprapa:10424

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Keywords: Electricity spot price; Heavy-tails; Spikes; Markov regime-switching; Pareto distribution;

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References

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  1. Fong Chan, Kam & Gray, Philip, 2006. "Using extreme value theory to measure value-at-risk for daily electricity spot prices," International Journal of Forecasting, Elsevier, Elsevier, vol. 22(2), pages 283-300.
  2. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 39-70.
  3. Byström, Hans, 2001. "Extreme Value Theory and Extremely Large Electricity Price Changes," Working Papers 2001:19, Lund University, Department of Economics.
  4. Simonsen, Ingve, 2005. "Volatility of power markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 10-20.
  5. Park, Haesun & Mjelde, James W. & Bessler, David A., 2006. "Price dynamics among U.S. electricity spot markets," Energy Economics, Elsevier, vol. 28(1), pages 81-101, January.
  6. Pavel Cizek & Wolfgang Karl Härdle & Rafal Weron, 2005. "Statistical Tools for Finance and Insurance," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0501.
  7. Huisman, R. & Mahieu, R.J., 2001. "Regime Jumps in Electricity Prices," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm 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 University Rotterdam.
  8. De Jong Cyriel, 2006. "The Nature of Power Spikes: A Regime-Switch Approach," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-28, September.
  9. Weron, Rafal, 2008. "Market price of risk implied by Asian-style electricity options and futures," Energy Economics, Elsevier, vol. 30(3), pages 1098-1115, May.
  10. Weron, Rafał, 2004. "Computationally intensive Value at Risk calculations," Papers 2004,32, Humboldt-Universität Berlin, Center for Applied Statistics and Economics (CASE).
  11. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
  12. Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics, EconWPA 0502005, EconWPA.
  13. Burnecki, Krzysztof & Klafter, Joseph & Magdziarz, Marcin & Weron, Aleksander, 2008. "From solar flare time series to fractional dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(5), pages 1077-1087.
  14. Bierbrauer, Michael & Menn, Christian & Rachev, Svetlozar T. & Truck, Stefan, 2007. "Spot and derivative pricing in the EEX power market," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3462-3485, November.
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Citations

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Cited by:
  1. Füss, Roland & Mahringer, Steffen & Prokopczuk, Marcel, 2013. "Electricity Derivatives Pricing with Forward-Looking Information," Working Papers on Finance 1317, University of St. Gallen, School of Finance.
  2. Joanna Janczura, 2012. "Pricing electricity derivatives within a Markov regime-switching model," Papers 1203.5442, arXiv.org.
  3. Joanna Janczura & Rafal Weron, 2011. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," HSC Research Reports, Hugo Steinhaus Center, Wroclaw University of Technology HSC/11/02, Hugo Steinhaus Center, Wroclaw University of Technology.
  4. Janczura, Joanna & Weron, Rafal, 2011. "Goodness-of-fit testing for the marginal distribution of regime-switching models," MPRA Paper 32532, University Library of Munich, Germany.
  5. 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.
  6. 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.
  7. 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.
  8. 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.
  9. Joanna Janczura & Rafal Weron, 2012. "Inference for Markov-regime switching models of electricity spot prices," HSC Research Reports, Hugo Steinhaus Center, Wroclaw University of Technology HSC/12/01, Hugo Steinhaus Center, Wroclaw University of Technology.
  10. : Enzo Fanone & Andrea Gamba & Marcel Prokopczuk, 2011. "The Case of Negative Day-Ahead Electricity Prices," Working Papers, Warwick Business School, Finance Group wpn11-01, Warwick Business School, Finance Group.
  11. Schneider, Stefan & Schneider, Stefan, 2010. "Power Spot Price Models with negative Prices," MPRA Paper 29958, University Library of Munich, Germany.
  12. 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.
  13. López Cabrera, Brenda & Odening, Martin & Ritter, Matthias, 2013. "Pricing rainfall futures at the CME," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4286-4298.
  14. Radu Porumb & Petru Postolache & George Serițan & Ramona Vatu & Oana Ceaki, 2013. "Load profiles analysis for electricity market," Computational Methods in Social Sciences (CMSS), "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences, vol. 1(2), pages 30-38, December.
  15. 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, Charles University Prague, Faculty of Social Sciences, vol. 62(2), pages 180-196, May.
  16. Haven, Emmanuel & Liu, Xiaoquan & Shen, Liya, 2012. "De-noising option prices with the wavelet method," European Journal of Operational Research, Elsevier, Elsevier, vol. 222(1), pages 104-112.
  17. Janczura, Joanna & Weron, Rafal, 2009. "Regime-switching models for electricity spot prices: Introducing heteroskedastic base regime dynamics and shifted spike distributions," MPRA Paper 18784, University Library of Munich, Germany.

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