An Empirical Examination of Deregulated Electricity Prices

POWER Working Paper No. PWP-087

42 Pages Posted: 19 Dec 2001

See all articles by Christopher R. Knittel

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Date Written: October 30, 2001

Abstract

In this paper, we present an empirical analysis of deregulated electricity prices. We begin by examining the distributional and temporal properties of the price process in a non-parametric framework. This analysis is followed by comparing the forecasting ability of several different statistical models. The findings reveal several characteristics unique to electricity prices, including deterministic components of the series at different frequencies and a high degree of persistence in the price level. An "inverse leverage effect" is also found, where positive shocks to the price series result in larger increases in volatility than negative shocks. Results consistent with other asset prices, such as time-varying volatility are also uncovered. We find that existing financial models of asset prices fail to forecast the extremely erratic nature of electricity prices. Non-Markovian specifications, in conjunction with exogenous information (e.g. weather), are a necessary starting point for practical applications, such as security pricing.

Suggested Citation

Knittel, Christopher R. and Roberts, Michael R., An Empirical Examination of Deregulated Electricity Prices (October 30, 2001). POWER Working Paper No. PWP-087, Available at SSRN: https://ssrn.com/abstract=294382 or http://dx.doi.org/10.2139/ssrn.294382

Christopher R. Knittel (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER)

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Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

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(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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