Abstract
A robust time-varying regime-switching model for price dynamics of hourly spot price of electricity on the electricity market is developed. We propose a two-state Markov Regime Switching (MRS) model that gives weight to the existence of different variance for each regime. Our model is tractable as it integrates the main features exhibited in the hourly spot price dynamics on the electricity market. The parameters of our hourly spot price of electricity market model are estimated using the Expectation Maximization algorithm. Based on this model, an efficient and tractable pricing technique can be developed to price the dynamics of the hourly spot price of electricity.
Highlights
Electricity, among other commodities, is one of the most important blessings science has given to the world
Our model is tractable as it integrates the main features exhibited in the hourly spot price dynamics on the electricity market
An efficient and tractable pricing technique can be developed to price the dynamics of the hourly spot price of electricity
Summary
Electricity, among other commodities, is one of the most important blessings science has given to the world It is an essential commodity for social and economic development of developing countries. In the early 1990s, the deregulation of the energy market (electricity market in our case) started in some countries (among others were the United Kingdom, Australia, and Norway) and gradually spread out to the European Union and the United States. This has created competitive markets that boost wholesale trading in most countries. There is the need to understand and model the spot price dynamics of the electricity market accurately to aid in an efficient pricing of electricity spots
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