Forecasting Day-Ahead Electricity Prices: Utilizing Hourly Prices

Tinbergen Institute Discussion Paper 13-068/III

35 Pages Posted: 18 May 2013  

Eran Raviv

APG Asset Management

Kees E. Bouwman

Cardano Risk Management

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Date Written: May 6, 2013

Abstract

The daily average price of electricity represents the price of electricity to be delivered over the full next day and serves as a key reference price in the electricity market. It is an aggregate that equals the average of hourly prices for delivery during each of the 24 individual hours. This paper demonstrates that the disaggregated hourly prices contain useful predictive information for the daily average price. Multivariate models for the full panel of hourly prices significantly outperform univariate models of the daily average price, with reductions in Root Mean Squared Error of up to 16%. Substantial care is required in order to achieve these forecast improvements. Rich multivariate models are needed to exploit the relations between different hourly prices, but the risk of overfitting must be mitigated by using dimension reduction techniques, shrinkage and forecast combinations.

Keywords: Electricity market, Forecasting, Hourly prices, Dimension reduction, Shrinkage, Forecast combinations

JEL Classification: C53, C32, Q47

Suggested Citation

Raviv, Eran and Bouwman, Kees E. and van Dijk, Dick J. C., Forecasting Day-Ahead Electricity Prices: Utilizing Hourly Prices (May 6, 2013). Tinbergen Institute Discussion Paper 13-068/III. Available at SSRN: https://ssrn.com/abstract=2266312 or http://dx.doi.org/10.2139/ssrn.2266312

Eran Raviv (Contact Author)

APG Asset Management ( email )

Gustav Mahlerplein 3
Amsterdam, 1082 MS
Netherlands

HOME PAGE: http://eranraviv.com/about/

Kees E. Bouwman

Cardano Risk Management ( email )

Rotterdam 3011 AA
Netherlands

Dick J.C. Van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

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