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Explaining Cointegration Analysis: Part 1

David F. Hendry and Katarina Juselius

Year: 2000
Volume: Volume21
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No1-1
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Abstract:
'Classical' econometric theory assumes that observed data come from a stationary process, where means and variances are constant over time. Graphs of economic time series, and the historical record of economic forecasting, reveal the invalidity of such an assumption. Consequently, we discuss the importance of stationarity for empirical modeling and inference; describe the effects of incorrectly assuming stationarity; explain the basic concepts of non-stationarity; note some sources of non-stationarity; formulate a class of non-stationary processes (autoregressions with unit roots) that seem empirically relevant for analyzing economic time series; and show when an analysis can be transformed by means of differencing and cointegrating combinations so stationarity becomes a reasonable assumption. We then describe how to test for unit roots and cointegration. Monte Carlo simulations and empirical examples illustrate the analysis.



Oil Production in the Lower 48 States: Economic, Geological, and Institutional Determinants

Robert K. Kaufmann and Cutler J. Cleveland

Year: 2001
Volume: Volume22
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No1-2
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Abstract:
In this paper, we establish an empirical model for oil production in the lower 48 states that represents its economic, physical, and institutional determinants. We estimate a vector error correction model for oil production in the lower 48 states that specifies real oil prices, average production costs, and prorationing by the Texas Railroad Commission. These modifications enable us to generate a model that accounts for most of the variation in oil production in the lower 48 states between 1938 and 1991. The result that oil production in the lower 48 states shares stochastic trends with real oil prices, average production costs, and prorationing indicates that accuracy of Hubbert's bell shaped curve is fortuitous. The importance of these factors also indicates why the basic Hotelling model cannot replicate the production path for oil in the lower 48 states. This inability is critical. The negative economic effects associated with high prices and energy shortages imply that the importance of inconsistencies with the basic Hotelling model identified by this analysis may be sufficient to warrant a greater degree of government intervention in the transition from oil than is currently envisioned by most policy makers.



Price Signals in "Energy-only" Wholesale Electricity Markets: An Empirical Analysis of the Price Signal in France

Philippe Vassilopoulos

Year: 2010
Volume: Volume 31
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-5
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Abstract:
This paper analyzes the price signals of the French wholesale electricity market. We build a model of electricity prices that takes into account several key features of the French electricity market in order to assess the capacity of the price signal to guide investments. Wholesale prices should reflect the imbalances in the generation mix but the signal can be distorted if monopoly rents and/or �missing money� are present. We simulate over the 2003-2005 period theoretical perfectly competitive prices with the installed capacity and with the optimal mix to estimate the capacity imbalances and scarcity rents. We then compare the investment signal sent by observed electricity prices and the theoretical prices with the installed capacity. Although there are signs of market contestability for the mid-merit load, through market integration with the other continental markets, observed prices are too high for the baseload and too low for the peakload, as a result distorting the signal.



Dead Battery? Wind Power, the Spot Market, and Hydropower Interaction in the Nordic Electricity Market

Johannes Mauritzen

Year: 2013
Volume: Volume 34
Number: Number 1
DOI: 10.5547/01956574.34.1.5
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Abstract:
It is well established within both the economics and power system engineering literature that hydropower can act as a complement to large amounts of intermittent energy. In particular hydropower can act as a "battery" where large amounts of wind power are installed. In this paper I use simple distributed lag models with data from Denmark and Norway. I find that increased wind power in Denmark causes increased marginal exports to Norway and that this effect is larger during periods of net exports when it is difficult to displace local production. Increased wind power can also be shown to slightly reduce prices in southern Norway in the short-run. Finally, I estimate that as much as 40 percent of wind power produced in Denmark is stored in Norwegian hydropower magazines.



Price Responsiveness in Electricity Markets: Implications for Demand Response in the Midwest

Derya Eryilmaz, Timothy M. Smith, and Frances R. Homans

Year: 2017
Volume: Volume 38
Number: Number 1
DOI: 10.5547/01956574.38.1.dery
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Abstract:
This paper provides an empirical analysis of price responsiveness in retail and wholesale markets in the Midcontinent ISO electricity markets. In the retail market, consumers do not often observe real-time price changes and pay a pre-determined flat rate, but are able to respond to price over longer time periods. In the wholesale electricity market, buyers are able to adjust their electricity purchases based on real-time price changes. Our findings show that retail industrial customers respond differently in different across states in the Midwest. We also find differences in real-time wholesale price elasticities between sub-regional pricing hubs in the MISO footprint. Results suggest that the observed differences in price responsiveness of demand across market levels and sub-regions are associated with demand response program adoption.





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