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Modeling and Forecasting the Distribution of Energy Forward Returns - Evidence from the Nordic Power Exchange

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  • Asger Lunde

    ()
    (Aarhus University and CREATES)

  • Kasper V. Olesen

    ()
    (Aarhus University and CREATES)

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    Abstract

    We explore the structure of transaction records from NASDAQ OMX Commodities Europe back to 2006 and analyze base load forwards with the Nordic system price on electric power as reference. Following a discussion of the appropriate rollover scheme we incorporate selected realizedmeasures of volatility in a Realized EGARCH framework for the joint modeling of returns and realized measures of volatility. Conditional variances are shown to vary over time, which stresses the importance of portfolio reallocation for risk management and other purposes. We document gains from utilizing data at higher frequencies by comparing to ordinary EGARCH models that are nested in the Realized EGARCH. We obtain improved fit, in-sample as well as out-of-sample. In-sample in terms of improved loglikelihood and out-of-sample in terms of 1-, 5-, and 20-step-ahead regular and bootstrapped rolling-window forecasts. The Realized EGARCH forecasts are statistically superior to ordinary EGARCH forecasts.

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    Bibliographic Info

    Paper provided by School of Economics and Management, University of Aarhus in its series CREATES Research Papers with number 2013-19.

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    Length: 37
    Date of creation: 05 2013
    Date of revision:
    Handle: RePEc:aah:create:2013-19

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    Web page: http://www.econ.au.dk/afn/

    Related research

    Keywords: Financial Volatility; Realized GARCH; High Frequency Data; Electricity; Power; Forecasting; Realized Variance; Realized Kernel; Model Confidence Set;

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