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Modelling the industrial production of electric and gas utilities through the $$CIR^3$$ C I R 3 model

Author

Listed:
  • Claudia Ceci

    (Università degli Studi di Roma “La Sapienza”)

  • Michele Bufalo

    (Università degli Studi di Roma “La Sapienza”)

  • Giuseppe Orlando

    (Università degli Studi di Bari “Aldo Moro”
    University of Jaen
    HSE University)

Abstract

This work aims to extend previous research on how a trifactorial stochastic model, which we call $$CIR^3$$ C I R 3 , can be turned into a forecasting tool for energy time series. In particular, in this work, we intend to predict changes in the industrial production of electric and gas utilities. The model accounts for several stylized facts such as the mean reversion of both the process and its volatility to a short-run mean, non-normality, autocorrelation, cluster volatility and fat tails. In addition to that, we provide two theoretical results which are of particular importance in modelling and simulations. The first is the proof of existence and uniqueness of the solution to the SDEs system that describes the model. The second theoretical result is to convert, by the means of Lamperti transformations, the correlated system into an uncorrelated one. The forecasting performance is tested against an ARIMA-GARCH and a nonlinear regression model (NRM).

Suggested Citation

  • Claudia Ceci & Michele Bufalo & Giuseppe Orlando, 2024. "Modelling the industrial production of electric and gas utilities through the $$CIR^3$$ C I R 3 model," Mathematics and Financial Economics, Springer, volume 18, number 1, October.
    • Handle: RePEc:spr:mathfi:v:18:y:2024:i:1:d:10.1007_s11579-023-00350-y
    DOI: 10.1007/s11579-023-00350-y
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    More about this item

    Keywords

    Energy; Forecasting; Three-factor stochastic model; Stochastic differential equations;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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