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Heavy-tails and regime-switching in electricity prices

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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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Authors and Affiliations

  1. Hugo Steinhaus Center, Institute of Mathematics and Computer Science, Wrocław University of Technology, Wrocław, Poland

    Rafał Weron

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  1. Rafał Weron
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Correspondence to Rafał Weron.

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Weron, R. Heavy-tails and regime-switching in electricity prices. Math Meth Oper Res 69, 457–473 (2009). https://doi.org/10.1007/s00186-008-0247-4

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  • DOI: https://doi.org/10.1007/s00186-008-0247-4

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