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Multivariate volatility modeling of electricity futures

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  • bauwens, Luc

    ()
    (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • hafner, Christian

    ()
    (Université catholique de Louvain, CORE and ISBA, B-1348 Louvain-la-Neuve, Belgium)

  • pierret, Diane

    ()
    (Université catholique de Louvain, ISBA, B-1348 Louvain-la-Neuve, Belgium)

Abstract

The deregulation of European electricity markets has led to an increasing need in understanding the volatility and correlation structure of electricity prices. We model a multivariate futures series of the European Energy Exchange (EEX) index, using an asymmetric GARCH model for volatilities and augmented dynamic conditional correlation (DCC) models for correlations. In particular, we allow for smooth changes in the unconditional volatilities and correlations through a multiplicative component that we estimate non-parametrically. We also introduce exogenous variables in our new multiplicative DCC model to account for congestion in short-term conditional volatilities. We find different correlation dynamics for long and short-term contracts and the new model achieves higher forecasting performance compared to a standard DCC model.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011011.

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Date of creation: 01 Feb 2011
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Handle: RePEc:cor:louvco:2011011

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Keywords: dynamic conditional correlation; electricity futures; forecasting;

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Cited by:
  1. Diaa Noureldin & Neil Shephard & Kevin Sheppard, 2012. "Multivariate Rotated ARCH models," Economics Series Working Papers 594, University of Oxford, Department of Economics.
  2. Noureldin, Diaa & Shephard, Neil & Sheppard, Kevin, 2014. "Multivariate rotated ARCH models," Journal of Econometrics, Elsevier, vol. 179(1), pages 16-30.
  3. Proietti, Tommaso, 2014. "Exponential Smoothing, Long Memory and Volatility Prediction," MPRA Paper 57230, University Library of Munich, Germany.
  4. Diego Fresoli & Esther Ruiz, 2014. "The uncertainty of conditional returns, volatilities and correlations in DCC models," Statistics and Econometrics Working Papers ws140202, Universidad Carlos III, Departamento de Estadística y Econometría.
  5. Palzer, Andreas & Westner, Günther & Madlener, Reinhard, 2012. "Evaluation of Different Hedging Strategies for Commodity Price Risks of Industrial Cogeneration Plants," FCN Working Papers 2/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Mar 2013.

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