On Transition Probabilities of Regime-Switching in Electricity Prices

24 Pages Posted: 4 Dec 2004

See all articles by Kazuhiko Ohashi

Kazuhiko Ohashi

Hitotsubashi University - Graduate School of International Corporate Strategy

Takashi Kanamura

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS)

Date Written: December 20, 2004

Abstract

We analyze transition probabilities of regime-switching in electricity prices based on supply and demand by using the structural model of Kanamura and Ohashi (2004). We show that the transition probabilities depend on the demand level and thus are not constant. This result is in sharp contrast to many models of electricity prices that assume constant transition probabilities among different regimes. We also estimate the model with a historical data in the PJM market, and analyze empirically the seasonality of the transition probabilities. The results obtained here are consistent with the observed characteristics of price spikes in electricity markets where the spikes tend to occur in summer and in winter when the demand level is high. These results support the argument by Lucia and Schwartz (2002) that asserts the importance of seasonality in modeling electricity prices.

Keywords: Electricity, Price Spikes, Transition probabilities

JEL Classification: C61, D21, G13, L94, Q40

Suggested Citation

Ohashi, Kazuhiko and Kanamura, Takashi, On Transition Probabilities of Regime-Switching in Electricity Prices (December 20, 2004). Available at SSRN: https://ssrn.com/abstract=626621 or http://dx.doi.org/10.2139/ssrn.626621

Kazuhiko Ohashi (Contact Author)

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

Tokyo 101-8439, Chiyoda-ku
Japan

Takashi Kanamura

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS) ( email )

1, Yoshida-Nakaadachi-cho, Sakyo-ku,
Kyoto, 606-8306
Japan
81-75-762-2004 (Phone)
81-75-762-2004 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
284
Abstract Views
2,334
rank
117,430
PlumX Metrics