Decomposing electricity prices with jumps

  • Eduardo Martínez Chombo Banco de México
Keywords: electricity prices, mean-reversion, jump modelling, markov switching models, state-space representation, energy finance
JEL Classification: C51, C52, C53, Q41

Abstract

We propose a model that decomposes electricity prices into two independent stochastic processes: one that represents the “normal” pattern of electricity prices and another that captures temporary shocks or “jumps”, with non-lasting effects in the market. Each contains specific mean reverting parameters to estimate. In order to identify such components we specify a state-space model with regime switching and apply the Kim’s (1994) filtering algorithm to estimate the model for the mean adjusted series of New South Wales’ electricity prices. Finally, bootstrap simulations were performed to estimate the expected contribution of each of the components in the overall electricity prices.

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Published
01-01-2005
How to Cite
Martínez ChomboE. (2005). Decomposing electricity prices with jumps. Estudios Económicos, 20(1), 27-52. https://doi.org/10.24201/ee.v20i1.169
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