An empirical comparison of alternate regime-switching models for electricity spot prices
One of the most profound features of electricity spot prices are the price spikes. Markov regime-switching (MRS) models seem to be a natural candidate for modeling this spiky behavior. However, in the studies published so far, the goodness-of-fit of the proposed models has not been a major focus. While most of the models were elegant, their fit to empirical data has either been not examined thoroughly or the signs of a bad fit ignored. With this paper we want to fill the gap. We calibrate and test a range of MRS models in an attempt to find parsimonious specifications that not only address the main characteristics of electricity prices but are statistically sound as well. We find that the best structure is that of an independent spike 3-regime model with time-varying transition probabilities, heteroscedastic diffusion-type base regime dynamics and shifted spike regime distributions. Not only does it allow for a seasonal spike intensity throughout the year and consecutive spikes or price drops, which is consistent with market observations, but also exhibits the 'inverse leverage effect' reported in the literature for spot electricity prices.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Janczura, Joanna & Weron, Rafal, 2010.
"Goodness-of-fit testing for regime-switching models,"
22871, University Library of Munich, Germany.
- 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.
- Karakatsani, Nektaria V. & Bunn, Derek W., 2008. "Intra-day and regime-switching dynamics in electricity price formation," Energy Economics, Elsevier, vol. 30(4), pages 1776-1797, July.
- T M Christensen & A S Hurn & K A Lindsay, 2008.
"It never rains but it pours: Modelling the persistence of spikes in electricity prices,"
NCER Working Paper Series
25, National Centre for Econometric Research.
- Timothy Christensen & Stan Hurn & Kenneth Lindsay, 2009. "It Never Rains but it Pours: Modeling the Persistence of Spikes in Electricity Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 25-48.
- Rafal Weron, 2006. "Modeling and Forecasting Electricity Loads and Prices: A Statistical Approach," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0601.
- Helyette Geman & A. Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," Post-Print halshs-00144198, HAL.
- Fleten, Stein-Erik & Lemming, Jacob, 2003. "Constructing forward price curves in electricity markets," Energy Economics, Elsevier, vol. 25(5), pages 409-424, September.
- Rafał Weron, 2009.
"Heavy-tails and regime-switching in electricity prices,"
Mathematical Methods of Operations Research,
Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 457-473, July.
- Weron, Rafal, 2008. "Heavy-tails and regime-switching in electricity prices," MPRA Paper 10424, University Library of Munich, Germany.
- Heydari, Somayeh & Siddiqui, Afzal, 2010. "Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility," Energy Economics, Elsevier, vol. 32(3), pages 709-725, May.
- Ralf Becker & Stan Hurn & Vlad Pavlov, 2007. "Modelling Spikes in Electricity Prices," The Economic Record, The Economic Society of Australia, vol. 83(263), pages 371-382, December.
- Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
- Huisman, Ronald, 2008. "The influence of temperature on spike probability in day-ahead power prices," Energy Economics, Elsevier, vol. 30(5), pages 2697-2704, September.
- Michael Bierbrauer & Stefan Trueck & Rafal Weron, 2005. "Modeling electricity prices with regime switching models," Econometrics 0502005, EconWPA.
- Aleksander Janicki & Aleksander Weron, 1994. "Simulation and Chaotic Behavior of Alpha-stable Stochastic Processes," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook9401.
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
- Kosater, Peter & Mosler, Karl, 2005.
"Can Markov-regime switching models improve power price forecasts? Evidence for German daily power prices,"
Discussion Papers in Econometrics and Statistics
1/05, University of Cologne, Institute of Econometrics and Statistics.
- Kosater, Peter & Mosler, Karl, 2006. "Can Markov regime-switching models improve power-price forecasts? Evidence from German daily power prices," Applied Energy, Elsevier, vol. 83(9), pages 943-958, September.
- Rafal Weron & Michael Bierbrauer & Stefan Trück, 2003.
"Modeling electricity prices: jump diffusion and regime switching,"
HSC Research Reports
HSC/03/01, Hugo Steinhaus Center, Wroclaw University of Technology.
- Weron, R & Bierbrauer, M & Trück, S, 2004. "Modeling electricity prices: jump diffusion and regime switching," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(1), pages 39-48.
- Joanna Janczura & Rafal Weron, 2011.
"Efficient estimation of Markov regime-switching models: An application to electricity spot prices,"
HSC Research Reports
HSC/11/02, Hugo Steinhaus Center, Wroclaw University of Technology.
- Joanna Janczura & Rafał Weron, 2012. "Efficient estimation of Markov regime-switching models: An application to electricity spot prices," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 96(3), pages 385-407, July.
- Weron, Rafal & Janczura, Joanna, 2010. "Efficient estimation of Markov regime-switching models: An application to electricity wholesale market prices," MPRA Paper 26628, University Library of Munich, Germany.
- Hélyette Geman & Andrea Roncoroni, 2006. "Understanding the Fine Structure of Electricity Prices," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1225-1262, May.
- Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
- Huisman, R. & Mahieu, R.J., 2001.
"Regime Jumps in Electricity Prices,"
ERIM Report Series Research in Management
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.
- Alvaro Cartea & Marcelo G. Figueroa & Helyette Geman, 2008.
"Modelling Electricity Prices with Forward Looking Capacity Constraints,"
Birkbeck Working Papers in Economics and Finance
0802, Birkbeck, Department of Economics, Mathematics & Statistics.
- Alvaro Cartea & Marcelo Figueroa & Helyette Geman, 2009. "Modelling Electricity Prices with Forward Looking Capacity Constraints," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(2), pages 103-122.
- Rafal Weron & Adam Misiorek, 2005. "Modeling and forecasting electricity loads: A comparison," Econometrics 0502004, EconWPA.
- Kanamura, Takashi & O[combining macron]hashi, Kazuhiko, 2008. "On transition probabilities of regime switching in electricity prices," Energy Economics, Elsevier, vol. 30(3), pages 1158-1172, May.
- 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.
- Kim, C-J., 1991.
"Dynamic Linear Models with Markov-Switching,"
91-8, York (Canada) - Department of Economics.
- Borak, Szymon & Weron, Rafal, 2008.
"A semiparametric factor model for electricity forward curve dynamics,"
10421, University Library of Munich, Germany.
- Szymon Borak & RafaÅ‚ Weron, 2008. "A semiparametric factor model for electricity forward curve dynamics," SFB 649 Discussion Papers SFB649DP2008-050, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
- Carlo Lucheroni, 2010. "Stochastic models of resonating markets," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 5(1), pages 77-88, June.
- Bowden, Nicholas & Payne, James E., 2008. "Short term forecasting of electricity prices for MISO hubs: Evidence from ARIMA-EGARCH models," Energy Economics, Elsevier, vol. 30(6), pages 3186-3197, November.
- repec:spr:compst:v:69:y:2009:i:3:p:457-473 is not listed on IDEAS
- Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
- 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.
- repec:dau:papers:123456789/1433 is not listed on IDEAS
- 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.
- Ramsey James B., 2002. "Wavelets in Economics and Finance: Past and Future," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(3), pages 1-29, November.
- M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
- 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.
- Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
- 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.
- Pavel Cizek & Wolfgang Karl Härdle & Rafal Weron, 2005. "Statistical Tools for Finance and Insurance," HSC Books, Hugo Steinhaus Center, Wroclaw University of Technology, number hsbook0501.
- Ramsey, J.B., 2002. "Wavelets in Economics and Finance: Past and Future," Working Papers 02-02, C.V. Starr Center for Applied Economics, New York University.
- Joanna Janczura & Rafal Weron, 2012. "Inference for Markov-regime switching models of electricity spot prices," HSC Research Reports HSC/12/01, Hugo Steinhaus Center, Wroclaw University of Technology.
When requesting a correction, please mention this item's handle: RePEc:eee:eneeco:v:32:y:2010:i:5:p:1059-1073. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.