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Modeling extreme dependence between European electricity markets

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  • Lindström, Erik
  • Regland, Fredrik

Abstract

Electricity spot prices are characterized by sudden large movements, followed a few days later by an equally large movement in the opposite direction. These phenomena are called spikes (upward movements) and drops (downward movements). Recent research has suggested that the dynamics of the electricity spot prices can be accurately described by hidden Markov Regime Switching (MRS) models. Regime switch models separate the ordinary dependence and the extreme (spike or drop) dependence. This is a crucial point since it is the extreme dependence that is of interest when computing risks.

Suggested Citation

  • Lindström, Erik & Regland, Fredrik, 2012. "Modeling extreme dependence between European electricity markets," Energy Economics, Elsevier, vol. 34(4), pages 899-904.
    • Handle: RePEc:eee:eneeco:v:34:y:2012:i:4:p:899-904
    DOI: 10.1016/j.eneco.2012.04.006
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    More about this item

    Keywords

    Hidden Markov Regime Switching models; Electricity spot price; Independent Spike models; Market integration;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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