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Regime-Switching Model on Hourly Electricity Spot Price Dynamics
Institute of Basic Sciences Technology and Innovation, Pan African University, Nairobi, Kenya
University of Nairobi, Nairobi, Kenya
- 1 Institute of Basic Sciences Technology and Innovation, Pan African University, Nairobi, Kenya
- 2 University of Nairobi, Nairobi, Kenya
Journal of Mathematical Finance·Volume 08 (2018)·Pages 102–110·Published 18 January 2018·DOI10.4236/jmf.2018.81008
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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.
KeywordsRegime-Switching ModelTime-Varying VolatilityHourly Spot Price of ElectricityExpectation-Maximization (EM)-Algorithm
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