## Abstract

A regime dependent VAR model is suggested that allows long memory (fractional

integration) in each of the regime states as well as the possibility of fractional cointegra-

tion. The model is relevant in describing the price dynamics of electricity prices where the

transmission of power is subject to occasional congestion periods. For a system of bilat-

eral prices non-congestion means that electricity prices are identical whereas congestion

makes prices depart. Hence, the joint price dynamics implies switching between essen-

tially a univariate price process under non-congestion and a bivariate price process under

congestion. At the same time it is an empirical regularity that electricity prices tend

to show a high degree of fractional integration, and thus that prices may be fractionally

cointegrated. An empirical analysis using Nord Pool data shows that even though the

prices strongly co-move under non-congestion, the prices are not, in general, fractional

cointegrated in the congestion state.

integration) in each of the regime states as well as the possibility of fractional cointegra-

tion. The model is relevant in describing the price dynamics of electricity prices where the

transmission of power is subject to occasional congestion periods. For a system of bilat-

eral prices non-congestion means that electricity prices are identical whereas congestion

makes prices depart. Hence, the joint price dynamics implies switching between essen-

tially a univariate price process under non-congestion and a bivariate price process under

congestion. At the same time it is an empirical regularity that electricity prices tend

to show a high degree of fractional integration, and thus that prices may be fractionally

cointegrated. An empirical analysis using Nord Pool data shows that even though the

prices strongly co-move under non-congestion, the prices are not, in general, fractional

cointegrated in the congestion state.

Originalsprog | Engelsk |
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Antal sider | 20 |

Status | Udgivet - 2007 |