%0 Journal Article
%K energy analysis and environmental impacts department
%K stochastic modeling
%K energy spot prices
%A Somayeh Heydari
%A Afzal S Siddiqui
%B Energy Economics 
%D 2009
%N Issue 3
%P 17
%T Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility
%V Vol. 32
%8 10/2009
%X <p>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.</p>