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Heavy-tails and regime-switching in electricity prices

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  • Rafał Weron

Abstract

In this paper we first analyze the stylized facts of electricity prices, in particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of price changes. Then we calibrate Markov regime-switching (MRS) models with heavy-tailed components and show that they adequately address the aforementioned characteristics. Contrary to the common belief that electricity price models ‘should be built on log-prices’, we find evidence that modeling the prices themselves is more beneficial and methodologically sound, at least in case of MRS models. Copyright Springer-Verlag 2009

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  • 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.
  • Handle: RePEc:spr:mathme:v:69:y:2009:i:3:p:457-473
    DOI: 10.1007/s00186-008-0247-4
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    More about this item

    Keywords

    Electricity spot price; Heavy-tails; Spikes; Markov regime-switching; Pareto distribution;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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