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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- Mount, Timothy D. & Ning, Yumei & Cai, Xiaobin, 2006. "Predicting price spikes in electricity markets using a regime-switching model with time-varying parameters," Energy Economics, Elsevier, vol. 28(1), pages 62-80, January.
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- M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
- Kanamura, Takashi & Ohashi, Kazuhiko, 2007. "A structural model for electricity prices with spikes: Measurement of spike risk and optimal policies for hydropower plant operation," Energy Economics, Elsevier, vol. 29(5), pages 1010-1032, September.
- Villaplana, Pablo, 2003. "Pricing power derivatives: a two-factor jump-diffusion approach," DEE - Working Papers. Business Economics. WB wb031805, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
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