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Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility
KTH, School of Information and Communication Technology (ICT), Computer and Systems Sciences, DSV.
2010 (English)In: Energy Economics, ISSN 0140-9883, E-ISSN 1873-6181, Vol. 32, no 3, 709-725 p.Article in journal (Refereed) Published
Abstract [en]

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.
Keyword [en]
Energy spot prices, Hamilton filter, Markov regime switching, Stochastic volatility, Variogram
National Category
Energy Engineering
URN: urn:nbn:se:kth:diva-46661DOI: 10.1016/j.eneco.2009.10.001ISI: 000276326200023ScopusID: 2-s2.0-77950540040OAI: diva2:454631
QC 20111107Available from: 2011-11-07 Created: 2011-11-04 Last updated: 2011-11-07Bibliographically approved

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Siddiqui, Afzal
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