An Econometric Study of Weather’s Effect on Prices

Abstract

This paper researches how weather affects the spot price of electricity. Determining a detailed correlation between the two would certainly be a valuable tool in forecasting prices. We can draw conclusions about the relationship by applying different econometric techniques and specifications. This paper serves as a survey of methods that an analyst may use to address the weather-price relationship. It lists several simple model specifications that prove quite informative. It discusses the Box-Cox Transformation method which is a very versatile technique and can be widely applied. This technique is considered most valuable to a broad constituency like these conference attendees that may have a wide range of data available. Also, the paper discusses ARCH and GARCH estimation of volatility — very insightful technique especially valuable in financial markets. The material is presented briefly to suggest directions of analysis to the readers. They can obtain more rigorous information from the references or by contacting the author.