Heavy-tails and regime-switching in electricity prices

Rafał Weron

Mathematical Methods of Operations Research, 2009, vol. 69, issue 3, 457-473

Abstract: In this paper we first analyze the stylized facts of electricity prices, in particular, the extreme volatility and price spikes which lead to heavy-tailed distributions of price changes. Then we calibrate Markov regime-switching (MRS) models with heavy-tailed components and show that they adequately address the aforementioned characteristics. Contrary to the common belief that electricity price models ‘should be built on log-prices’, we find evidence that modeling the prices themselves is more beneficial and methodologically sound, at least in case of MRS models. Copyright Springer-Verlag 2009

Keywords: Electricity spot price; Heavy-tails; Spikes; Markov regime-switching; Pareto distribution (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (53)

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DOI: 10.1007/s00186-008-0247-4

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