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Forecasting Electricity Market Risk Using Empirical Mode Decomposition (EMD)—Based Multiscale Methodology

Author

Listed:
  • Kaijian He

    () (School of Business, Hunan University of Science and Technology, Xiangtan 411201, China)

  • Hongqian Wang

    () (Payment and Settlement Department, Software Center, Bank of China, Beijing 100094, China)

  • Jiangze Du

    () (School of Finance, Jiangxi University of Finance and Economics, Nanchang 330013, China)

  • Yingchao Zou

    () (College of Information Science and Technology, Beijing University of Chemical Technology, Beijing 100029, China
    School of Economics and Management, Beijing University of Chemical Technology, Beijing 100029, China)

Abstract

The electricity market has experienced an increasing level of deregulation and reform over the years. There is an increasing level of electricity price fluctuation, uncertainty, and risk exposure in the marketplace. Traditional risk measurement models based on the homogeneous and efficient market assumption no longer suffice, facing the increasing level of accuracy and reliability requirements. In this paper, we propose a new Empirical Mode Decomposition (EMD)-based Value at Risk (VaR) model to estimate the downside risk measure in the electricity market. The proposed model investigates and models the inherent multiscale market risk structure. The EMD model is introduced to decompose the electricity time series into several Intrinsic Mode Functions (IMF) with distinct multiscale characteristics. The Exponential Weighted Moving Average (EWMA) model is used to model the individual risk factors across different scales. Experimental results using different models in the Australian electricity markets show that EMD-EWMA models based on Student’s t distribution achieves the best performance, and outperforms the benchmark EWMA model significantly in terms of model reliability and predictive accuracy.

Suggested Citation

  • Kaijian He & Hongqian Wang & Jiangze Du & Yingchao Zou, 2016. "Forecasting Electricity Market Risk Using Empirical Mode Decomposition (EMD)—Based Multiscale Methodology," Energies, MDPI, Open Access Journal, vol. 9(11), pages 1-11, November.
  • Handle: RePEc:gam:jeners:v:9:y:2016:i:11:p:931-:d:82489
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    References listed on IDEAS

    as
    1. Kostas Andriosopoulos & Nikos Nomikos, 2015. "Risk management in the energy markets and Value-at-Risk modelling: a hybrid approach," The European Journal of Finance, Taylor & Francis Journals, vol. 21(7), pages 548-574, May.
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    Cited by:

    1. repec:gam:jsusta:v:10:y:2018:i:1:p:118-:d:125663 is not listed on IDEAS
    2. repec:gam:jeners:v:10:y:2017:i:6:p:809-:d:101438 is not listed on IDEAS

    More about this item

    Keywords

    Empirical Mode Decomposition (EMD); electricity market risk; Value at Risk (VaR); Exponential Weighted Moving Average (EWMA);

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other

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