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A two-factor model for electricity prices with dynamic volatility

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  • Schlüter, Stephan

Abstract

The wavelet transform is used to identify a biannual and an annual seasonality in the Phelix Day Peak and to separate the long-term trend from its short-term motion. The short-term/long-term model for commodity prices of Schwartz & Smith (2000) is applied but generalised to account for weekly periodicities and time-varying volatility. Eventually we find a bivariate SARMA-CCC-GARCH model to fit best. Moreover it surpasses the goodness of fit of an univariate GARCH model, which shows that the additional effort of dealing with a two-factor model is worthwile.

Suggested Citation

  • Schlüter, Stephan, 2009. "A two-factor model for electricity prices with dynamic volatility," FAU Discussion Papers in Economics 04/2009, Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics.
  • Handle: RePEc:zbw:iwqwdp:042009
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    Keywords

    Wavelets; Seasonal Filter; Relative Wavelet Energy; Multivariate GARCH; Energy Price Modelling;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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