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On transition probabilities of regime switching in electricity prices

  • Kanamura, Takashi
  • O[combining macron]hashi, Kazuhiko
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    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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    File URL: http://www.sciencedirect.com/science/article/B6V7G-4P8B0T9-2/1/3eb42f7d0cde66453818df71a267ffcb
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 30 (2008)
    Issue (Month): 3 (May)
    Pages: 1158-1172

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    Handle: RePEc:eee:eneeco:v:30:y:2008:i:3:p:1158-1172
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. 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.
    2. de Jong, C.M. & Huisman, R., 2002. "Option Formulas for Mean-Reverting Power Prices with Spikes," ERIM Report Series Research in Management ERS-2002-96-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.
    3. 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.
    4. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
    5. 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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