Valuing a gas-fired power plant: A comparison of ordinary linear models, regime-switching approaches, and models with stochastic volatility
Date Published |
10/2009
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Publication Type | Journal Article
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Authors | |
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Abstract |
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. |
Journal |
Energy Economics
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Volume |
Vol. 32
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Year of Publication |
2009
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Issue |
Issue 3
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Pagination |
17
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Keywords | |
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File(s) | |
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