On transition probabilities of regime switching in electricity prices
We analyze the transition probabilities of regime switching in electricity prices by explicitly incorporating the underlying demand/supply structure. We show that the transition probabilities of electricity prices cannot be constant, and depend on both the current demand level relative to the supply capacity and the trends of demand fluctuation. These results not only contrast with the assumption of constant transition probabilities on which many regime-switching models are built, but also provide new insights on the determinants of the state-dependent transition probabilities of regime switching.
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- Pablo Villaplana, 2003. "Pricing Power Derivatives: A Two-Factor Jump-Diffusion Approach," Business Economics Working Papers wb031805, Universidad Carlos III, Departamento de Economía de la Empresa.
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