Multivariate Volatility Modeling of Electricity Futures

Journal of Applied Econometrics, 28/5, 743-761, 2013

24 Pages Posted: 9 May 2017

See all articles by Luc Bauwens

Luc Bauwens

Université catholique de Louvain

Christian Hafner

Catholic University of Louvain (UCL) - School of Statistics; Tinbergen Institute

Diane Pierret

Universite du Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)

Date Written: December 7, 2011

Abstract

We model the dynamic volatility and correlation structure of electricity futures of the European Energy Exchange index. We use a new multiplicative dynamic conditional correlation (mDCC) model to separate long-run from short-run components. We allow for smooth changes in the unconditional volatilities and correlations through a multiplicative component that we estimate nonparametrically. For the short-run dynamics, we use a GJR-GARCH model for the conditional variances and augmented DCC models for the conditional correlations. We also introduce exogenous variables to account for congestion and delivery date effects in short-term conditional variances. We find different correlation dynamics for long- and short-term contracts and the new model achieves higher forecasting performance compared \to a standard DCC model.

Appendix is available at:https://ssrn.com/abstract=2965511

Keywords: Multivariate GARCH, dynamic correlations, multiplicative model, forecasting, electricity futures

JEL Classification: C32, C53, C58

Suggested Citation

Bauwens, Luc and Hafner, Christian and Pierret, Diane, Multivariate Volatility Modeling of Electricity Futures (December 7, 2011). Journal of Applied Econometrics, 28/5, 743-761, 2013, Available at SSRN: https://ssrn.com/abstract=2965508

Luc Bauwens (Contact Author)

Université catholique de Louvain ( email )

CORE
34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium
32 10 474321 (Phone)
32 10 474301 (Fax)

Christian Hafner

Catholic University of Louvain (UCL) - School of Statistics ( email )

Voie du Roman Pay
34 B-1348 Louvain-La-Neuve, 1348
Belgium

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Diane Pierret

Universite du Luxembourg - Luxembourg School of Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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