Regime Jumps in Electricity Prices

Ronald Huisman and Ronald Mahieu

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: Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. As many international electricity markets are in some state of deregulation, more and more participants in these markets are exposed to these stylised facts. Appropriate pricing, portfolio, and risk management models should incorporate these facts. Authors have introduced stochastic jump processes to deal with the jumps, but we argue and show that this specification might lead to problems with identifying the true mean-reversion within the process. Instead, we propose using a regime jump model that disentangles mean-reversion from jump behaviour. This model resembles more closely the true price path of electricity prices.

Keywords: electricity prices; international energy markets; jumps; mean reversion; stochastic models (search for similar items in EconPapers)
JEL-codes: G3 M Q31 (search for similar items in EconPapers)
Date: 2001-08-15
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Citations: View citations in EconPapers (13)

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Journal Article: Regime jumps in electricity prices (2003)
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