An Empirical Examination of Deregulated Electricity Prices
Christopher R. Knittel
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Michael R. Roberts
The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)
October 30, 2001
POWER Working Paper No. PWP-087
In this paper, we present an empirical analysis of deregulated electricity prices. We begin by examining the distributional and temporal properties of the price process in a non-parametric framework. This analysis is followed by comparing the forecasting ability of several different statistical models. The findings reveal several characteristics unique to electricity prices, including deterministic components of the series at different frequencies and a high degree of persistence in the price level. An "inverse leverage effect" is also found, where positive shocks to the price series result in larger increases in volatility than negative shocks. Results consistent with other asset prices, such as time-varying volatility are also uncovered. We find that existing financial models of asset prices fail to forecast the extremely erratic nature of electricity prices. Non-Markovian specifications, in conjunction with exogenous information (e.g. weather), are a necessary starting point for practical applications, such as security pricing.
Number of Pages in PDF File: 42working papers series
Date posted: December 19, 2001
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