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Quantifying the Impact of Risk on Market Volatility and Price: Evidence from the Wholesale Electricity Market in Portugal

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  • Negin Entezari

    (Faculty of Economics, University of Coimbra, Av Dias da Silva 165, 3004-512 Coimbra, Portugal)

  • José Alberto Fuinhas

    (Centre for Business and Economics Research (CeBER), Faculty of Economics, University of Coimbra, Av Dias da Silva 165, 3004-512 Coimbra, Portugal)

Abstract

This research aims to identify suitable procedures for determining the size of risks to predict the tendency of electricity prices to return to their historical average or mean over time. The goal is to quantify the sensitivity of electricity prices to different types of shocks to mitigate price volatility risks that affect Portugal’s energy market. Hourly data from the beginning of January 2016 to December 2021 were used for the analysis. The symmetric and asymmetric GARCH model volatility, as a function of past information, help to eliminate excessive peaks in data fluctuations. The asymmetric model includes additional parameters to separately obtain the impact of positive and negative shocks on volatility. The MSGARCH model is estimated to be in two states, allowing for transitions between low- and high-volatility states. This approach effectively represents the significant impact of shocks in a high-volatility state, indicating an acknowledgment of the lasting effects of extreme events on financial markets. Furthermore, the MSGARCH model is designed to obtain the persistence of shocks during periods of elevated volatility. Accurate price forecasting aids power producers in anticipating potential price trends and allows them to adjust their operations by considering the overall stability and efficiency of the electricity market.

Suggested Citation

  • Negin Entezari & José Alberto Fuinhas, 2024. "Quantifying the Impact of Risk on Market Volatility and Price: Evidence from the Wholesale Electricity Market in Portugal," Sustainability, MDPI, vol. 16(7), pages 1-21, March.
    • Handle: RePEc:gam:jsusta:v:16:y:2024:i:7:p:2691-:d:1363486
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    References listed on IDEAS

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