Heavy-tails and regime-switching in electricity prices |
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Authors: | Rafa? Weron |
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Institution: | (1) Hugo Steinhaus Center, Institute of Mathematics and Computer Science, Wrocław University of Technology, Wrocław, Poland |
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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. |
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Keywords: | Electricity spot price Heavy-tails Spikes Markov regime-switching Pareto distribution |
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