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

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  • Joanna Janczura
  • Rafal 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 gamma 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.

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File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_11_02.pdf
File Function: Original version, 2011
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Bibliographic Info

Paper provided by Hugo Steinhaus Center, Wroclaw University of Technology in its series HSC Research Reports with number HSC/11/02.

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Length: 24 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:wuu:wpaper:hsc1102

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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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  5. Janczura, Joanna & Weron, Rafal, 2010. "An empirical comparison of alternate regime-switching models or electricity spot prices," MPRA Paper 20546, University Library of Munich, Germany.
  6. Szymon Borak & Rafał Weron, 2008. "A semiparametric factor model for electricity forward curve dynamics," SFB 649 Discussion Papers SFB649DP2008-050, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  9. Benth, Fred Espen & Cartea, Álvaro & Kiesel, Rüdiger, 2008. "Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/12158, Universidad Carlos III de Madrid.
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  11. 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.
  12. Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
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Citations

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Cited by:
  1. Eichler Michael & Tuerk Dennis, 2012. "Fitting semiparametric Markov regime-switching models to electricity spot prices," Research Memoranda 036, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  2. Janczura, Joanna & Weron, Rafal, 2010. "Goodness-of-fit testing for regime-switching models," MPRA Paper 22871, University Library of Munich, Germany.
  3. Stéphane Goutte & Benteng Zou, 2012. "Continuous time regime switching model applied to foreign exchange rate," Working Papers hal-00643900, HAL.
  4. 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.
  5. Janczura, Joanna & Trueck, Stefan & Weron, Rafal & Wolff, Rodney, 2012. "Identifying spikes and seasonal components in electricity spot price data: A guide to robust modeling," MPRA Paper 39277, University Library of Munich, Germany.
  6. 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.
  7. Stéphane GOUTTE & Benteng Zou, 2011. "Foreign exchange rates under Markov Regime switching model," CREA Discussion Paper Series 11-16, Center for Research in Economic Analysis, University of Luxembourg.
  8. Stéphane Goutte, 2012. "Conditional Markov regime switching model applied to economic modelling," Working Papers hal-00747479, HAL.
  9. Jakub Nowotarski & Jakub Tomczyk & Rafal Weron, 2012. "Robust estimation and forecasting of the long-term seasonal component of electricity spot prices," HSC Research Reports HSC/12/06, Hugo Steinhaus Center, Wroclaw University of Technology.
  10. Joanna Janczura, 2012. "Pricing electricity derivatives within a Markov regime-switching model," Papers 1203.5442, arXiv.org.

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