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A threshold autoregressive model for wholesale electricity prices
Author(s) -
Ricky Rambharat B.,
Brockwell Anthony E.,
Seppi Duane J.
Publication year - 2005
Publication title -
journal of the royal statistical society: series c (applied statistics)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.205
H-Index - 72
eISSN - 1467-9876
pISSN - 0035-9254
DOI - 10.1111/j.1467-9876.2005.00484.x
Subject(s) - mean reversion , autoregressive model , econometrics , markov chain monte carlo , jump , autoregressive integrated moving average , jump diffusion , spot contract , monte carlo method , economics , markov chain , electricity , statistics , mathematics , time series , engineering , financial economics , physics , quantum mechanics , electrical engineering , futures contract
Summary. We introduce a discrete time model for electricity prices which accounts for both transitory spikes and temperature effects. The model allows for different rates of mean reversion: one for weather events, one around price jumps and another for the remainder of the process. We estimate the model by using a Markov chain Monte Carlo approach with 3 years of daily data from Allegheny County, Pennsylvania. We show that our model outperforms existing stochastic jump diffusion models for this data set. Results also demonstrate the importance of model parameters corresponding to both the temperature effect and the multilevel mean reversion rate.