Weron, Rafal and Janczura, Joanna (2010): Efficient estimation of Markov regimeswitching models: An application to electricity wholesale market prices.

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Abstract
In this paper we discuss the calibration issues of models built on meanreverting processes combined with Markov switching. Due to the unobservable switching mechanism, estimation of Markov regimeswitching (MRS) models requires inferring not only the model parameters but also the state process values at the same time. The situation becomes more complicated when the individual regimes are independent from each other and at least one of them exhibits temporal dependence (like mean reversion in electricity spot prices). Then the temporal latency of the dynamics in the regimes as to be taken into account. In this paper we propose a method that greatly reduces the computational burden induced by the introduction of independent regimes in MRS models. We perform a simulation study to test the efficiency of the proposed method and apply it to a sample series of wholesale electricity spot prices from the German EEX market. The proposed 3regime MRS model fits this data well and also contains unique features that allow for useful interpretations of the price dynamics.
Item Type:  MPRA Paper 

Original Title:  Efficient estimation of Markov regimeswitching models: An application to electricity wholesale market prices 
Language:  English 
Keywords:  Markov regimeswitching; heteroskedasticity; EM algorithm; independent regimes; electricity spot price 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C51  Model Construction and Estimation C  Mathematical and Quantitative Methods > C1  Econometric and Statistical Methods and Methodology: General > C13  Estimation: General Q  Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q4  Energy > Q40  General 
Item ID:  26628 
Depositing User:  Rafal Weron 
Date Deposited:  11. Nov 2010 10:45 
Last Modified:  14. Feb 2013 11:16 
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URI:  http://mpra.ub.unimuenchen.de/id/eprint/26628 