The Power of Weather

34 Pages Posted: 20 Oct 2011

See all articles by Christian Huurman

Christian Huurman

Financial Engineering Associates

Francesco Ravazzolo

Free University of Bolzano

Chen Zhou

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Multiple version iconThere are 2 versions of this paper

Date Written: December 19, 2009

Abstract

This paper examines the predictive power of weather for electricity prices in day ahead markets in real time. We find that next-day weather forecasts improve the forecast accuracy of Scandinavian day-ahead electricity prices substantially in terms of point forecasts, suggesting that weather forecasts can price the weather premium. This improvement strengthens the confidence in the forecasting model, which results in high center-mass predictive densities. In density forecast, such a predictive density may not accommodate forecasting uncertainty well. Our density forecast analysis confirms this intuition by showing that incorporating weather forecasts in density forecasting does not deliver better density forecast performances.

Keywords: Electricity prices, weather forecasts, point and density forecasts, GARCH models

JEL Classification: C53, G15, Q40

Suggested Citation

Huurman, Christian and Ravazzolo, Francesco and Zhou, Chen, The Power of Weather (December 19, 2009). De Nederlandsche Bank Working Paper No. 236. Available at SSRN: https://ssrn.com/abstract=1946302 or http://dx.doi.org/10.2139/ssrn.1946302

Christian Huurman (Contact Author)

Financial Engineering Associates ( email )

75 King William Street
London EC4N 7BE
United Kingdom

Francesco Ravazzolo

Free University of Bolzano ( email )

Bolzano
Italy

Chen Zhou

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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