An empirical comparison of alternate regime-switching models for electricity spot prices

Joanna Janczura and Rafał Weron

Energy Economics, 2010, vol. 32, issue 5, 1059-1073

Abstract: One of the most profound features of electricity spot prices are the price spikes. Markov regime-switching (MRS) models seem to be a natural candidate for modeling this spiky behavior. However, in the studies published so far, the goodness-of-fit of the proposed models has not been a major focus. While most of the models were elegant, their fit to empirical data has either been not examined thoroughly or the signs of a bad fit ignored. With this paper we want to fill the gap. We calibrate and test a range of MRS models in an attempt to find parsimonious specifications that not only address the main characteristics of electricity prices but are statistically sound as well. We find that the best structure is that of an independent spike 3-regime model with time-varying transition probabilities, heteroscedastic diffusion-type base regime dynamics and shifted spike regime distributions. Not only does it allow for a seasonal spike intensity throughout the year and consecutive spikes or price drops, which is consistent with market observations, but also exhibits the 'inverse leverage effect' reported in the literature for spot electricity prices.

Keywords: Electricity; spot; price; Spikes; Markov; regime-switching; Heteroscedasticity; Inverse; leverage; effect (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (118)

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Related works:
Working Paper: An empirical comparison of alternate regime-switching models or electricity spot prices (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:32:y:2010:i:5:p:1059-1073

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