Volatility transmission and volatility impulse response functions in European electricity forward markets
AbstractUsing 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 an indication of market efficiency. Finally, we estimate the density of the VIRF at different forecast horizon. These fitted distributions are asymmetric and show that extreme events are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy is based on option prices which themselves depend on the volatility level.
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Bibliographic InfoPaper provided by CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1 in its series Cahiers du CREDEN (CREDEN Working Papers) with number 08.09.77.
Length: 29 pages
Date of creation: 2008
Date of revision:
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More information through EDIRC
volatility impulse response function; GARCH; non Gaussian distributions; electricity market; forward markets;
Other versions of this item:
- Le Pen, Yannick & Sévi, Benoît, 2010. "Volatility transmission and volatility impulse response functions in European electricity forward markets," Energy Economics, Elsevier, vol. 32(4), pages 758-770, July.
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- G1 - Financial Economics - - General Financial Markets
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-20 (All new papers)
- NEP-EEC-2008-09-20 (European Economics)
- NEP-ENE-2008-09-20 (Energy Economics)
- NEP-ETS-2008-09-20 (Econometric Time Series)
- NEP-FMK-2008-09-20 (Financial Markets)
- NEP-RMG-2008-09-20 (Risk Management)
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