Adding Dummy Variables: A Simple Approach for Improved Volatility Forecasting in Electricity Market

42 Pages Posted: 30 Mar 2022

See all articles by Xu Gong

Xu Gong

Xiamen University

Boqiang Lin

Xiamen University - Collaborative Innovation Center for Energy Economics and Energy Policy

Abstract

This paper uses dummy variables to measure day-of-the-week effects and structural breaks on volatility. Considering day-of-the-week effects, structural breaks, or both, we propose three classes of HAR models for forecasting electricity volatility based on the existing HAR models. The estimation results of the models show that day-of-the-week effects only improve the fitting ability of HAR models for forecasting electricity volatility at daily horizon, and structural breaks can improve the in-sample performance of HAR models when forecasting electricity volatilities at daily, weekly, and monthly horizons. The out-of-sample analysis indicates that both day-of-the-week effects and structural breaks contain additional ex ante information for predicting electricity volatility, and in most cases dummy variables for measuring structural breaks contain more out-of-sample predictive information than those for measuring day-of-the-week effects. The out-of-sample results are robust across three different ways. More importantly, we argue that adding dummy variables for measuring day-of-the-week effects and structural breaks can improve the performance of most of the other existing HAR models for forecasting volatility in electricity market.

Keywords: Day-of-the-week effects, Structural breaks, Volatility Forecasting, Realized volatility, Electricity market

Suggested Citation

Gong, Xu and Lin, Boqiang, Adding Dummy Variables: A Simple Approach for Improved Volatility Forecasting in Electricity Market. Available at SSRN: https://ssrn.com/abstract=4070569 or http://dx.doi.org/10.2139/ssrn.4070569

Xu Gong (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Boqiang Lin

Xiamen University - Collaborative Innovation Center for Energy Economics and Energy Policy ( email )

Fujian
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
28
Abstract Views
195
PlumX Metrics