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Efficient estimation of Markov regime-switching models: An application to electricity spot prices

Joanna Janczura and Rafał Weron ()

No HSC/11/02, HSC Research Reports from Hugo Steinhaus Center, Wroclaw University of Technology

Abstract: In this paper we discuss the calibration of models built on mean-reverting processes combined with Markov regime-switching (MRS). We propose a method that greatly reduces the computational burden induced by the introduction of independent regimes and perform a simulation study to test its efficiency. Our method allows for a 100 to over 1000 times faster calibration than in case of a competing approach utilizing probabilities of the last 10 observations. It is also more general and admits any value of gamma in the base regime dynamics. Since the motivation for this research comes from a recent stream of literature in energy economics, we apply the new method to sample series of electricity spot prices from the German EEX and Australian NSW markets. The proposed MRS models fit these datasets well and replicate the major stylized facts of electricity spot price dynamics.

Keywords: Markov regime-switching; Energy economics; Electricity spot price; EM algorithm; Independent regimes (search for similar items in EconPapers)
JEL-codes: C13 C51 Q40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm, nep-ene and nep-ore
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14) Track citations by RSS feed

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http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_11_02.pdf Original version, 2011 (application/pdf)

Related works:
Journal Article: Efficient estimation of Markov regime-switching models: An application to electricity spot prices (2012) Downloads
Working Paper: Efficient estimation of Markov regime-switching models: An application to electricity wholesale market prices (2010) Downloads
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