Does economic policy uncertainty drive volatility spillovers in electricity markets: Time and frequency evidence

Although the close relationship between economic conditions and electricity price variations has been well documented in previous studies, the issue of how volatility spillovers in electricity markets respond to the uncertainty of economic circumstances remains unclear. Using a novel dataset of 12 European electricity markets from 2009 to 2020, this paper applies recently developed volatility spillover approaches to quantify the time-frequency volatility connectedness of European electricity markets for the first time and, on this basis, investigates the impact of economic policy uncertainty on the cross-market volatility spillover effects. Our first key finding is that the overall connectedness of the European electricity markets is relatively high, but it varies over time and exhibits drastic changes during economic and geopolitical events. Second, volatility spillovers at different frequencies show strong heterogeneity, with the short-term effects accounting for the largest proportion of cross-market volatility spillovers in the European electricity system. Finally, increases in economic policy uncertainty in Europe significantly drive up volatility spillovers in the electricity markets but this effect holds mainly for the medium- and long-term effects, while the short-term spillover effects are almost independent of European economic policy uncertainty. Our results have important risk management implications for participants and regulators in European electricity markets.