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A Vector Autoregressive Model for Electricity Prices Subject to Long Memory and Regime Switching

Niels Haldrup (), Frank Nielsen and Morten Nielsen ()

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: A regime dependent VAR model is suggested that allows long memory (fractional integration) in each of the regime states as well as the possibility of fractional cointegra- tion. The model is relevant in describing the price dynamics of electricity prices where the transmission of power is subject to occasional congestion periods. For a system of bilat- eral prices non-congestion means that electricity prices are identical whereas congestion makes prices depart. Hence, the joint price dynamics implies switching between essen- tially a univariate price process under non-congestion and a bivariate price process under congestion. At the same time it is an empirical regularity that electricity prices tend to show a high degree of fractional integration, and thus that prices may be fractionally cointegrated. An empirical analysis using Nord Pool data shows that even though the prices strongly co-move under non-congestion, the prices are not, in general, fractional cointegrated in the congestion state.

Keywords: Cointegration; electricity prices; fractional integration; long memory; Markov switching (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene
Date: 2007-10-03
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Journal Article: A vector autoregressive model for electricity prices subject to long memory and regime switching (2010) Downloads
Working Paper: A Vector Autoregressive Model For Electricity Prices Subject To Long Memory And Regime Switching (2009) Downloads
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