Modeling electricity spot and futures price dependence: A multifrequency approach

Pekka Malo

Physica A: Statistical Mechanics and its Applications, 2009, vol. 388, issue 22, 4763-4779

Abstract: Electricity prices are known to exhibit multifractal properties. We accommodate this finding by investigating multifractal models for electricity prices. In this paper we propose a flexible Copula-MSM (Markov Switching Multifractal) approach for modeling spot and weekly futures price dynamics. By using a conditional copula function, the framework allows us to separately model the dependence structure, while enabling use of multifractal stochastic volatility models to characterize fluctuations in marginal returns. An empirical experiment is carried out using data from Nord Pool. A study of volatility forecasting performance for electricity spot prices reveals that multifractal techniques are a competitive alternative to GARCH models. We also demonstrate how the Copula-MSM model can be employed for finding optimal portfolios, which minimizes the Conditional Value-at-Risk.

Keywords: Electricity; Markov-Switching; Copula; Risk; Multifrequency; Econophysics (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:388:y:2009:i:22:p:4763-4779

DOI: 10.1016/j.physa.2009.07.048

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