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Analyzing the influence of geopolitical risks on European power prices using a multiresolution causal neural network

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  • Saâdaoui, Foued
  • Ben Jabeur, Sami

Abstract

This paper presents a rigorous investigation into the multiresolution cross-correlation and causality between European energy markets and geopolitical risk (GPR). Using daily electricity spot prices from January 2015 to January 2023, the study employs the variational mode decomposition (VMD) method to uncover the underlying patterns and reveal the interaction between European power prices and GPR. The paper further develops a VMD-assisted multi-scaled causal neural network (VMD-M-CNN) as a multivariable forecasting approach, benchmarking it against other competing models. The results demonstrate a strong dependence between electricity markets and GPR across different investment time-scale horizons. Additionally, the relationship between the two has taken different forms over the crisis period in contrast with calm periods. The proposed VMD-M-CNN approach proves to be more effective than other benchmark models, providing valuable insights for market participants and policymakers to make informed decisions. The rigorous methodology employed and the novel approach developed enhance the credibility and robustness of the study, contributing to the growing body of literature on energy markets and GPR.

Suggested Citation

  • Saâdaoui, Foued & Ben Jabeur, Sami, 2023. "Analyzing the influence of geopolitical risks on European power prices using a multiresolution causal neural network," Energy Economics, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:eneeco:v:124:y:2023:i:c:s0140988323002918
    DOI: 10.1016/j.eneco.2023.106793
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    Cited by:

    1. Hille, Erik, 2023. "Europe's energy crisis: Are geopolitical risks in source countries of fossil fuels accelerating the transition to renewable energy?," Energy Economics, Elsevier, vol. 127(PA).

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    More about this item

    Keywords

    Multiresolution machine learning; Causal neural network; Variational mode decomposition; Forecasting; Electricity prices; Geopolitical risks;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C87 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Econometric Software
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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