The Nature of Power Spikes: a regime-switch approach

Cyriel de Jong

ERIM Report Series Research in Management from 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

Abstract: Due to its non-storable nature, electricity is a commodity with probably the most volatile spot prices, exemplified by occasional spikes. Appropriate pricing, portfolio, and risk management models have to incorporate these characteristics, and the spikes in particular. We investigate the nature of power spikes in a number of different markets. We test what time-series model is best able to capture the dynamics of these disruptive spot prices. We use regime-switching models to infer whether the price spikes should be treated as abnormal and independent deviations from the ‘normal’ price dynamics or whether they form an integral part of the price process. We test the time-series models on day-ahead markets in Europe and the US. We find that regimeswitch models are better able to capture the market dynamics than a GARCH(1,1) or Poisson jump model. We also find clear differences between the markets and attribute part of the differences to the share of hydro-power in the total supply stack: hydro-power serves as an indirect means to store electricity, which has a dampening effect on spikes.

Keywords: power prices; regime-switches; risk; spikes; spot markets; volatility (search for similar items in EconPapers)
JEL-codes: C22 G10 G3 M O13 Q41 (search for similar items in EconPapers)
Date: 2005-10-14
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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