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Forecasting hourly electricity prices using ARMAX–GARCH models: An application to MISO hubs

  • Hickey, Emily
  • Loomis, David G.
  • Mohammadi, Hassan
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    The recent deregulation of the electricity industry and reliance on competitive wholesale markets has generated significant volatility in wholesale electricity prices. Given the importance of short-term price forecasts in this new environment, this paper estimates and evaluates the forecasting performance of four ARMAX–GARCH models for five MISO pricing hubs (Cinergy, First Energy, Illinois, Michigan, and Minnesota) using hourly data from June 1, 2006 to October 6, 2007. Our empirical results reveal three important patterns: (a) electricity price volatility is regional and the optimum volatility model depends in part on the hub location, the forecast horizon, and regulated versus unregulated status of the market; (b) the APARCH model performs well in hubs in deregulated states; and (c) volatility dynamics in regulated states are better captured by a simple GARCH model and thus are less complex.

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    Article provided by Elsevier in its journal Energy Economics.

    Volume (Year): 34 (2012)
    Issue (Month): 1 ()
    Pages: 307-315

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    Handle: RePEc:eee:eneeco:v:34:y:2012:i:1:p:307-315
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