Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility
2010 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 32, no 3, 709-725 p.Article in journal (Refereed) Published
Energy prices are often highly volatile with unexpected spikes. Capturing these sudden spikes may lead to more informed decision-making in energy investments, such as valuing gas-fired power plants, than ignoring them. In this paper, non-linear regime-switching models and models with mean-reverting stochastic volatility are compared with ordinary linear models. The study is performed using UK electricity and natural gas daily spot prices and suggests that with the aim of valuing a gas-fired power plant with and without operational flexibility, non-linear models with stochastic volatility, specifically for logarithms of electricity prices, provide better out-of-sample forecasts than both linear models and regime-switching models.
Place, publisher, year, edition, pages
2010. Vol. 32, no 3, 709-725 p.
Energy spot prices, Hamilton filter, Markov regime switching, Stochastic volatility, Variogram
IdentifiersURN: urn:nbn:se:kth:diva-46661DOI: 10.1016/j.eneco.2009.10.001ISI: 000276326200023ScopusID: 2-s2.0-77950540040OAI: oai:DiVA.org:kth-46661DiVA: diva2:454631
QC 201111072011-11-072011-11-042011-11-07Bibliographically approved