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Volatility transmission and volatility impulse response functions in European electricity forward markets

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  • Sévi, Benoît
  • Le Pen, Yannick

Abstract

Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719–740] Volatility Impulse Response Function (VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be a consequence of the non-storability of power. Finally, we estimate the density of the VIRF at different forecast horizons. These fitted distributions are asymmetric and show that large increases in expected conditional volatilities are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy depends on option prices which themselves depend on the characteristics of volatility.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/5450.

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Date of creation: 2010
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Publication status: Published in Energy economics, 2010, Vol. 32, no. 4. pp. 758-770.Length: 12 pages
Handle: RePEc:dau:papers:123456789/5450

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Keywords: volatility spillovers; electricity forward markets; multivariate GARCH; volatility impulse response function; transmission de volatilité; marché forward de l’électricité; GARCH multivarié; Fonction impulsion réponse de volatilité;

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Cited by:
  1. Lindström, Erik & Regland, Fredrik, 2012. "Modeling extreme dependence between European electricity markets," Energy Economics, Elsevier, vol. 34(4), pages 899-904.

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