Dynamic Conditional Correlation between Electricity and Stock Markets During the Financial Crisis in Greece

Abstract

Liberalization of electricity markets has increasingly created the need for understanding the volatility and correlation structure between electricity and financial markets. This work reveals the existence of structural changes in correlation patterns among these two markets and links the changes to both fundamentals and regulatory conditions prevailing in the markets, as well as the current European financial crisis. We apply a Dynamic Conditional Correlation (DCC) GARCH model to a set of market’s fundamental variables and Greece’s financial market and microeconomic indexes to study their interaction. Emphasis is given on the period of severe financial crisis of the Country to understand “contagion” and volatility spillover between these two markets.

Keywords: Dynamic Conditional Correlation, Energy Markets, Electricity Markets, Financial Markets, Greece