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An hour-ahead prediction model for heavy-tailed spot prices

Listed author(s):
  • Kim, Jae Ho
  • Powell, Warren B.
Registered author(s):

    We propose an hour-ahead prediction model for electricity prices that capture the heavy tailed behavior that we observe in the hourly spot market in the Ercot (Texas) and the PJM West hub grids. We present a model according to which we separate the price process into a thin-tailed trailing median process and a heavy-tailed residual process whose probability distribution can be approximated by a Cauchy distribution. We show empirical evidence that supports our model.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0140988311001290
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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 33 (2011)
    Issue (Month): 6 ()
    Pages: 1252-1266

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    Handle: RePEc:eee:eneeco:v:33:y:2011:i:6:p:1252-1266
    DOI: 10.1016/j.eneco.2011.06.007
    Contact details of provider: Web page: http://www.elsevier.com/locate/eneco

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    1. Taleb, Nassim Nicholas, 2009. "Errors, robustness, and the fourth quadrant," International Journal of Forecasting, Elsevier, vol. 25(4), pages 744-759, October.
    2. Huisman, Ronald & Mahieu, Ronald, 2003. "Regime jumps in electricity prices," Energy Economics, Elsevier, vol. 25(5), pages 425-434, September.
    3. Danielsson, J. & de Haan, L. & Peng, L. & de Vries, C. G., 2001. "Using a Bootstrap Method to Choose the Sample Fraction in Tail Index Estimation," Journal of Multivariate Analysis, Elsevier, vol. 76(2), pages 226-248, February.
    4. Alvaro Cartea & Marcelo Figueroa, 2005. "Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(4), pages 313-335.
    5. R. F. Engle & A. J. Patton, 2001. "What good is a volatility model?," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 237-245.
    6. Ait-Sahalia, Yacine, 2004. "Disentangling diffusion from jumps," Journal of Financial Economics, Elsevier, vol. 74(3), pages 487-528, December.
    7. Taleb, Nassim Nicholas, 2007. "Black Swans and the Domains of Statistics," The American Statistician, American Statistical Association, vol. 61, pages 198-200, August.
    8. W. Breymann & A. Dias & P. Embrechts, 2003. "Dependence structures for multivariate high-frequency data in finance," Quantitative Finance, Taylor & Francis Journals, vol. 3(1), pages 1-14.
    9. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2004. "What really causes large price changes?," Quantitative Finance, Taylor & Francis Journals, vol. 4(4), pages 383-397.
    10. Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
    11. Bjørn Eraker, 2004. "Do Stock Prices and Volatility Jump? Reconciling Evidence from Spot and Option Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1367-1404, 06.
    12. J. Doyne Farmer & Fabrizio Lillo, 2003. "On the origin of power law tails in price fluctuations," Papers cond-mat/0309416, arXiv.org, revised Jan 2004.
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