Volatility and Liquidity on High-frequency Electricity Futures Markets: Empirical Analysis and Stochastic Modeling
International Journal of Theoretical and Applied Finance, 23(4):2050027, 2020
34 Pages Posted: 17 Jun 2019 Last revised: 3 Aug 2020
Date Written: August 3, 2020
This paper investigates the relationship between volatility and liquidity on the German electricity futures market based on high-frequency intraday prices. We estimate volatility by the time-weighted realized variance acknowledging that empirical intraday prices are not equally spaced in time. Empirical evidence suggests that volatility of electricity futures decreases as time approaches maturity, while coincidently liquidity increases. Established continuous-time stochastic models for electricity futures prices involve a growing volatility function in time and are thus not able to capture our empirical findings a priori. We demonstrate that incorporating increasing liquidity into the established models is key to model the decreasing volatility evolution.
Keywords: Volatility, Liquidity, Electricity futures, High-frequency prices, Stochastic modeling, Monte Carlo simulation, Time-weighted realized variance
JEL Classification: C13, C15, G10, G13, Q41
Suggested Citation: Suggested Citation