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A note on using the Hodrick-Prescott filter in electricity markets

Listed author(s):
  • Rafal Weron
  • Michal Zator

Recently, Nowotarski et al. (2013) have found that wavelet-based models for the long-term seasonal component (LTSC) are not only better in extracting the LTSC from a series of spot electricity prices but also significantly more accurate in terms of forecasting these prices up to a year ahead than the commonly used monthly dummies and sine-based models. However, a clear disadvantage of the wavelet-based approach is the increased complexity of the technique as compared to the other two classes of LTSC models, which may render it too complicated for practitioners. To facilitate this problem, we propose here a much simpler, yet equally powerful method for identifying the LTSC in electricity spot price series. It makes use of the Hodrick-Prescott (HP) filter, a widely-recognized tool in macroeconomics.

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File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_14_04.pdf
File Function: Original version, 2014
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Paper provided by Hugo Steinhaus Center, Wroclaw University of Technology in its series HSC Research Reports with number HSC/14/04.

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Length: 9 pages
Date of creation: 20 Mar 2014
Handle: RePEc:wuu:wpaper:hsc1404
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