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Multivariate volatility modeling of electricity futures

  • bauwens, Luc

    ()

    (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)

  • hafner, Christian

    ()

    (Université catholique de Louvain, CORE and ISBA, B-1348 Louvain-la-Neuve, Belgium)

  • pierret, Diane

    ()

    (Université catholique de Louvain, ISBA, B-1348 Louvain-la-Neuve, Belgium)

The deregulation of European electricity markets has led to an increasing need in understanding the volatility and correlation structure of electricity prices. We model a multivariate futures series of the European Energy Exchange (EEX) index, using an asymmetric GARCH model for volatilities and augmented dynamic conditional correlation (DCC) models for correlations. In particular, we allow for smooth changes in the unconditional volatilities and correlations through a multiplicative component that we estimate non-parametrically. We also introduce exogenous variables in our new multiplicative DCC model to account for congestion in short-term conditional volatilities. We find different correlation dynamics for long and short-term contracts and the new model achieves higher forecasting performance compared to a standard DCC model.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2011011.

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Date of creation: 01 Feb 2011
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Handle: RePEc:cor:louvco:2011011
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