Self exciting threshold auto-regressive approach for non-linear modelling of daily electricity prices in the selected regions

by Miroslav ČULÍK , Jiří VALECKÝ


JEL classification

  • Estimation: General
  • Econometrics
  • Model Evaluation, Validation, and Selection


Electricity, electricity price, non-linear time series, regime-switching model, SETAR model


This paper is concentrating on the electricity market and electricity prices. The electricity sector is one of the key strategic sectors of every economy and knowledge of demand, supply and prices are very important. Because of the features occurring in the time series of electricity prices (i.e. high frequency, non-constant mean, autocorrelation, non-normal distribution, heteroscedasticity, seasonality, etc.), it is necessary to employ more sophisticated models for the purposes of their modelling. The goal of this paper is to propose the empirical model for modelling daily electricity prices in three selected regions (California, North Europe and Austria). To exploit non-linearity, we apply the SETAR (Self Exciting Threshold Auto-Regressive) models that imply and distinct regimes in time series dynamics with potentially different parameters (and thus dynamics properties) of each regimes. First, the most appropriate SETAR model for modelling electricity prices at selected markets is developed; next, statistical verification of each model is performed in accordance with Hansen (1997, 2000); finally, it is verified whether the proposed non-linear models give satisfactory results in the sense of data fitting and diagnostic checks.