Estimation of the Semiparametric Factor Model: Application to Modelling Time Series of Electricity Spot Prices

Dominik Liebl

MPRA Paper from University Library of Munich, Germany

Abstract: Classical univariate and multivariate time series models have problems to deal with the high variability of hourly electricity spot prices. We propose to model alternatively the daily mean electricity supply functions using a dynamic factor model. And to derive, subsequently, the hourly electricity spot prices by the evaluation of the estimated supply functions at the corresponding hourly values of demand for electricity. Supply functions are price (EUR/MWh) functions, that increase monotonically with demand for electricity (MW). Apart from this new conceptual approach, that allows us to represent the auction design of energy exchanges in a most natural way, our main contribution is an extraordinary simple algorithm to estimate the factor structure of the dynamic factor model. We decompose the time series into a functional spherical component and an univariate scaling component. The elements of the spherical component are all standardized having unit size such that we can robustly estimate the factor structure. This algorithm is much simpler than procedures suggested in the literature. In order to use a parsimonious labeling we will refer to the daily mean supply curves simply as price curves.

Keywords: Factor Analysis; functional time series data; sparse data; electricity spot market prices; European Electricity Exchange (EEX) (search for similar items in EconPapers)
JEL-codes: C01 C1 C14 C22 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ecm and nep-ene
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