Market Design, Bidding Rules, and Long Memory in Electricity Prices
In uniform price, sealed-bid day-ahead electricity auctions, the market price is set at the intersection between aggregate demand and supply functions built by a market operator. Each day, just one agent - the marginal generator - owns the market-clearing plant. Day-ahead auctions are moreover embedded in multi-segment systems, wherein diverse protocols coexist and change over time. Such a complex environment leads to adoption of simple, adaptive bidding rules. Specifically, such a market design lets two different types of routines emerge, depending on whether the agent is a likely marginal or inframarginal generator. However, because of the uniform price mechanism, only the bidding behavior of the former can be reflected into market prices. Depending on the specific way marginal generators process past information to set their bids - 'hyperbolic' or 'exponential' - electricity prices are likely to display long- or short-memory. Experimental evidence on hyperbolic discounting - a quite robust behavioral bias in humans - supports a long-memory view of electricity prices. This insight is broadly confirmed by spectral analysis of daily data from NordPool and CalPX markets, in sharp contrast with most previous empirical studies. This paper underlines the importance of institutional settings in determining market outcomes, and an interesting mapping of bidding rules and models of information processing into the time series properties of market prices.
|Date of creation:||01 Apr 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.lem.sssup.it/
More information through EDIRC
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.:
- Giovanni Dosi & Luigi Marengo & Giorgio Fagiolo, 1996.
"Learning in evolutionary environment,"
CEEL Working Papers
9605, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
- Scharfstein, David S & Stein, Jeremy C, 1990.
"Herd Behavior and Investment,"
American Economic Review,
American Economic Association, vol. 80(3), pages 465-79, June.
- Parisio, Lucia & Bosco, Bruno, 2003. "Market Power and the Power Market: Multi-unit Bidding and (In)Efficiency in Electricity Auctions," International Tax and Public Finance, Springer, vol. 10(4), pages 377-401, August.
- Hylleberg, S. & Engle, R.F. & Granger, C.W.J. & Yoo, B.S., 1988.
"Seasonal, Integration And Cointegration,"
6-88-2, Pennsylvania State - Department of Economics.
- Catherine D. Wolfram, 1999. "Measuring Duopoly Power in the British Electricity Spot Market," American Economic Review, American Economic Association, vol. 89(4), pages 805-826, September.
- Kirman, A., 1997.
"Interaction and Markets,"
ASSET - Instituto De Economia Publica
166, ASSET (Association of Southern European Economic Theorists).
- Marius Ooms & M. Angeles Carnero & Siem Jan Koopman, 2004. "Periodic Heteroskedastic RegARFIMA models for daily electricity spot prices," Econometric Society 2004 Australasian Meetings 158, Econometric Society.
- Green, Richard & Newbery, David M G, 1991.
"Competition in the British Electricity Spot Market,"
CEPR Discussion Papers
557, C.E.P.R. Discussion Papers.
- Green, Richard J & Newbery, David M, 1992. "Competition in the British Electricity Spot Market," Journal of Political Economy, University of Chicago Press, vol. 100(5), pages 929-53, October.
- S. James Press, 1967. "A Compound Events Model for Security Prices," The Journal of Business, University of Chicago Press, vol. 40, pages 317.
- Alvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002.
"Modeling Electricity Prices: International Evidence,"
Economics Working Papers
we022708, Universidad Carlos III, Departamento de Economía.
- Alvaro Escribano & J. Ignacio Peña & Pablo Villaplana, 2011. "Modelling Electricity Prices: International Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 73(5), pages 622-650, October.
- Sonnenschein, Hugo, 1972. "Market Excess Demand Functions," Econometrica, Econometric Society, vol. 40(3), pages 549-63, May.
- Cameron, Lisa & Cramton, Peter, 1999.
"The Role of the ISO in U.S. Electricity Markets: A Review of Restructuring in California and PJM,"
The Electricity Journal,
Elsevier, vol. 12(3), pages 71-81, April.
- Lisa Cameron & Peter Cramton, 1999. "The Role of the ISO in U.S. Electricity Markets: A Review of Restructuring in California and PJM," Papers of Peter Cramton 99ej, University of Maryland, Department of Economics - Peter Cramton, revised 01 Apr 1999.
- Merton, Robert C., 1975.
"Option pricing when underlying stock returns are discontinuous,"
787-75., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
- M. Angeles Carnero & Siem Jan Koopman & Marius Ooms, 2003. "Periodic Heteroskedastic RegARFIMA Models for Daily Electricity Spot Prices," Tinbergen Institute Discussion Papers 03-071/4, Tinbergen Institute.
- Joskow, Paul L, 1996. "Introducing Competition into Regulated Network Industries: From Hierarchies to Markets in Electricity," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 341-82.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991.
"Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?,"
Cowles Foundation Discussion Papers
979, Cowles Foundation for Research in Economics, Yale University.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
- Tom Doan, . "KPSS: RATS procedure to perform KPSS (Kwiatowski, Phillips, Schmidt, and Shin) stationarity test," Statistical Software Components RTS00100, Boston College Department of Economics.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Bower, John & Bunn, Derek, 2001. "Experimental analysis of the efficiency of uniform-price versus discriminatory auctions in the England and Wales electricity market," Journal of Economic Dynamics and Control, Elsevier, vol. 25(3-4), pages 561-592, March.
- Brousseau, Eric & Glachant, Jean-Michel, 2002. "The economics of contracts: Theories and applications," Economics Papers from University Paris Dauphine 123456789/12331, Paris Dauphine University.
- Paul L. Joskow, 2001.
"California's Electricity Crisis,"
NBER Working Papers
8442, National Bureau of Economic Research, Inc.
- Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
- Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
- Lo, Andrew W. (Andrew Wen-Chuan), 1989.
"Long-term memory in stock market prices,"
3014-89., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Laibson, David I., 1997.
"Golden Eggs and Hyperbolic Discounting,"
4481499, Harvard University Department of Economics.
- Frank A. Wolak & Robert H. Patrick, 2001. "The Impact of Market Rules and Market Structure on the Price Determination Process in the England and Wales Electricity Market," NBER Working Papers 8248, National Bureau of Economic Research, Inc.
- Byström, Hans, 2001.
"Extreme Value Theory and Extremely Large Electricity Price Changes,"
2001:19, Lund University, Department of Economics.
- Bystrom, Hans N. E., 2005. "Extreme value theory and extremely large electricity price changes," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 41-55.
- Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-73, July.
- Baillie, Richard T., 1996. "Long memory processes and fractional integration in econometrics," Journal of Econometrics, Elsevier, vol. 73(1), pages 5-59, July.
- Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
- repec:dgr:uvatin:2003071 is not listed on IDEAS
- Lawrence M. Ausubel & Peter Cramton, 1995.
"Demand Reduction and Inefficiency in Multi-Unit Auctions,"
Papers of Peter Cramton
98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002.
- Lawrence M. Ausubel & Peter Cramton & Marek Pycia & Marzena Rostek & Marek Weretka, 2014. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Review of Economic Studies, Oxford University Press, vol. 81(4), pages 1366-1400.
- Rafal Weron & Ingve Simonsen & Piotr Wilman, 2003. "Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market," Econometrics 0303007, EconWPA.
- Giulio Bottazzi & Giovanni Dosi & Igor Rebesco, 2002. "Institutional Architectures and Behavioural Ecologies in the Dynamics of Financial Markets: a Preliminary Investigation," LEM Papers Series 2002/24, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- Dosi, G & Egidi, M, 1991. "Substantive and Procedural Uncertainty: An Exploration of Economic Behaviours in Changing Environments," Journal of Evolutionary Economics, Springer, vol. 1(2), pages 145-68, April.
- Ángel León & Antonio Rubia, 2001. "Comportamiento Del Precio Y Volatilidad En El Pool Eléctrico Español," Working Papers. Serie EC 2001-04, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Green, Richard, 2006. "Market power mitigation in the UK power market," Utilities Policy, Elsevier, vol. 14(2), pages 76-89, June.
- Amihud, Yakov & Mendelson, Haim, 1987. " Trading Mechanisms and Stock Returns: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 42(3), pages 533-53, July.
- Debreu, Gerard, 1974. "Excess demand functions," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 15-21, March.
- De Vany, Arthur S. & Walls, W. David, 1999. "Cointegration analysis of spot electricity prices: insights on transmission efficiency in the western US," Energy Economics, Elsevier, vol. 21(5), pages 435-448, October.
- Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
- Knittel, Christopher R. & Roberts, Michael R., 2005. "An empirical examination of restructured electricity prices," Energy Economics, Elsevier, vol. 27(5), pages 791-817, September.
- Ferrara, Laurent & Guegan, Dominique, 2001. "Forecasting with k-Factor Gegenbauer Processes: Theory and Applications," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 20(8), pages 581-601, December.
When requesting a correction, please mention this item's handle: RePEc:ssa:lemwps:2004/07. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.