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Forecasting of volatility and risk premia in electricity markets

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  • Thomas K. Kloster
  • Fred Espen Benth

Abstract

We study forecasting of the realized covariation in electricity markets. The realized covariation in this context is a matrix-valued representation of the latent infinite-dimensional covariance operator and a parsimonious matrix-HAR type model is constructed to facilitate estimation. We test the model on one-week ahead forecasts of the weekly realized covariation and find that the inclusion of longer time horizons and renewable generation information adds important predictive power. We also investigate the prediction of risk premia in electricity forward markets and find that our variance forecasts provide substantially improved forecasts of spread risk premia compared to standard methods relying on backward looking volatility.

Suggested Citation

  • Thomas K. Kloster & Fred Espen Benth, 2026. "Forecasting of volatility and risk premia in electricity markets," Papers 2606.05991, arXiv.org.
    • Handle: RePEc:arx:papers:2606.05991
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    References listed on IDEAS

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    1. Thomas K. Kloster & Fred Espen Benth, 2026. "The fine structure of electricity price volatility," Papers 2605.13320, arXiv.org.
    2. Laurent, Sébastien & Rombouts, Jeroen V.K. & Violante, Francesco, 2013. "On loss functions and ranking forecasting performances of multivariate volatility models," Journal of Econometrics, Elsevier, vol. 173(1), pages 1-10.
    3. Peter R. Hansen & Asger Lunde & James M. Nason, 2011. "The Model Confidence Set," Econometrica, Econometric Society, vol. 79(2), pages 453-497, March.
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