A Dutch power retailer hedges its sales commitments in the forwards market, based on its sales channels estimation.
1. Write the densities of the observations under the two regimes.
2. Compute the probabilities of being in each regime based on transition probabilities and densities.
3. Write the conditional likelihood function as a function of the above quantities.
4. Estimate the autoregressive parameters Ck maximizing the log likelihood.
5. The maximum-likelihood estimation optimal parameters are then used in a final pass through the filter to draw probabilistic inference about regime states St.
|Switching probability cutoff||50%||75%||85%|
|Percentage of spikes detected||91%||86%||81%|
|Percentageof spikes suggested incorrectly||12%||4.3%||0.5%|
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