A Vector Autoregressive Model for Electricity Prices Subject to Long Memory and Regime Switching

Publikation: Working paperForskning

  • Niels Haldrup
  • Frank Nielsen, Danmark
  • Morten Ørregaard Nielsen, Cornell University, USA
  • Institut for Økonomi
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.
Antal sider20
StatusUdgivet - 2007

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