Robust estimation and forecasting of the long-term seasonal component of electricity spot prices

Nowotarski, Jakub and Tomczyk, Jakub and Weron, Rafal (2012): Robust estimation and forecasting of the long-term seasonal component of electricity spot prices.

Abstract

When building stochastic models for electricity spot prices the problem of uttermost importance is the estimation and consequent forecasting of a component to deal with trends and seasonality in the data. While the short-term seasonal components (daily, weekly) are more regular and less important for valuation of typical power derivatives, the long-term seasonal components (LTSC; seasonal, annual) are much more difficult to tackle. Surprisingly, in many academic papers dealing with electricity spot price modeling the importance of the seasonal decomposition is neglected and the problem of forecasting it is not considered. With this paper we want to fill the gap and present a thorough study on estimation and forecasting of the LTSC of electricity spot prices. We consider a battery of models based on Fourier or wavelet decomposition combined with linear or exponential decay. We find that all considered wavelet-based models are significantly better in terms of forecasting spot prices up to a year ahead than all considered sine-based models. This result questions the validity and usefulness of stochastic models of spot electricity prices built on sinusoidal long-term seasonal components.

• Item Type: MPRA Paper
• Language: English
• Keywords: Electricity spot price; Long-term seasonal component; Robust modeling; Forecasting; Wavelets
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C45 - Neural Networks and Related Topics; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q4 - Energy > Q47 - Energy Forecasting; C - Mathematical and Quantitative Methods > C8 - Data Collection and Data Estimation Methodology ; Computer Programs > C80 - General

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