Modeling the Daily Electricity Price Volatility with Realized Measures

22 Pages Posted: 17 Sep 2013

See all articles by Michael Frömmel

Michael Frömmel

Ghent University - Department of Financial Economics

Xing Han

University of Auckland Business School; Ghent University - Department of Financial Economics

Stepan Kratochvil

Czech Technical University in Prague - Faculty of Electrical Engineering

Date Written: September 16, 2013

Abstract

We propose using the Realized GARCH model to estimate the daily price volatility in the EPEX power markets. The model specification extracts the volatility-related information from realized measures, which substantially improves the in-sample fit of the data compared to the standard EGARCH model. More importantly, evidence on the out-of-sample forecasts reinforces the value of the specifications as the forecast quality is improved over the benchmark model under eight conventional criteria. The increased forecast accuracy is robust under both the rolling-window and recursive estimation scheme. Finally, we show that intra-day range is an effective volatility indicator in the power market as the benefit of including intra-day range is substantial as compared to realized variance.

Keywords: volatility forecasting, intra-day range, Realized GARCH, electricity

JEL Classification: C51, C53, G10

Suggested Citation

Frömmel, Michael and Han, Xing and Kratochvil, Stepan, Modeling the Daily Electricity Price Volatility with Realized Measures (September 16, 2013). Available at SSRN: https://ssrn.com/abstract=2327117 or http://dx.doi.org/10.2139/ssrn.2327117

Michael Frömmel (Contact Author)

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Xing Han

University of Auckland Business School ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, 9000
Belgium

Stepan Kratochvil

Czech Technical University in Prague - Faculty of Electrical Engineering ( email )

Technicka 2
Prague, 166 27
Czech Republic

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