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A threshold autoregressive model for wholesale electricity prices

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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.
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Keywords: Electricity prices; Markov chain Monte Carlo methods; Spikes; Threshold autoregressive model

Document Type: Research Article

Affiliations: Carnegie Mellon University, Pittsburgh, USA

Publication date: 01 April 2005

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