MULTIVARIATE VOLATILITY MODELING OF ELECTRICITY FUTURES
Article first published online: 17 MAY 2012
Copyright © 2012 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 28, Issue 5, pages 743–761, August 2013
How to Cite
Bauwens, L., Hafner, C. M. and Pierret, D. (2013), MULTIVARIATE VOLATILITY MODELING OF ELECTRICITY FUTURES. J. Appl. Econ., 28: 743–761. doi: 10.1002/jae.2280
- Issue published online: 29 JUL 2013
- Article first published online: 17 MAY 2012
- Manuscript Revised: 7 DEC 2011
- Manuscript Received: 26 APR 2011
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. Copyright © 2012 John Wiley & Sons, Ltd.