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Regime Jumps in Electricity Prices

Listed author(s):
  • Huisman, R.
  • Mahieu, R.J.

Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.

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File URL: https://repub.eur.nl/pub/111/erimrs20010815170147.pdf
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Paper provided by 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 in its series ERIM Report Series Research in Management with number ERS-2001-48-F&A.

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Date of creation: 15 Aug 2001
Handle: RePEc:ems:eureri:111
Contact details of provider: Postal:
RSM Erasmus University & Erasmus School of Economics, PoBox 1738, 3000 DR Rotterdam

Phone: 31-10-408 1182
Fax: 31-10-408 9020
Web page: http://www.erim.eur.nl/
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  1. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
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