Volatility Transmission and Volatility Impulse Response Functions in European Electricity Forward Markets

29 Pages Posted: 23 Jan 2009 Last revised: 18 Jan 2017

See all articles by Yannick Le Pen

Yannick Le Pen

Université Paris Dauphine

Benoît Sévi

University of Nantes

Date Written: October 19, 2008

Abstract

Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719-740] Volatility Impulse Response Function (VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be an indication of market efficiency. Finally, we estimate the density of the VIRF at different forecast horizon. These fitted distributions are asymmetric and show that extreme events are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy is based on option prices which themselves depend on the volatility level.

Keywords: volatility impulse response function, GARCH, electricity forward markets

JEL Classification: C3, G1, Q43

Suggested Citation

Le Pen, Yannick and Sévi, Benoît, Volatility Transmission and Volatility Impulse Response Functions in European Electricity Forward Markets (October 19, 2008). Available at SSRN: https://ssrn.com/abstract=1286836 or http://dx.doi.org/10.2139/ssrn.1286836

Yannick Le Pen (Contact Author)

Université Paris Dauphine ( email )

Place du Maréchal de Lattre de Tassigny
75775
France

Benoît Sévi

University of Nantes ( email )

1, quai de Tourville BP
Nantes Cedex 1
Nantes, 44313
France

HOME PAGE: http://www.iemniae.univ-nantes.fr/sevi-b/0/fiche___annuaireksup/

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