Tail Risk Connectedness in the Australian National Electricity Markets: The Impact of Rare Events

Son Duy Pham (), Hung Xuan Do (), Rabindra Nepal and Tooraj Jamasb
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Son Duy Pham: University of Aberdeen Business School, Dunbar Street, Aberdeen, UK
Hung Xuan Do: School of Economics and Finance, Massey University, New Zealand

No 9-2024, Working Papers from Copenhagen Business School, Department of Economics

Abstract: The tail risks can exhibit different and important features than average measures of risk in interconnected electricity markets. This paper examines the interconnectedness of tail risks within the regionally interconnected Australian National Electricity Market. We use the Conditional Autoregressive Value-at-Risk (CAViaR) and time-varying parameter vector autoregression (TVP-VAR) connectedness approach. Analysing historical data between 01 January 2006 and 04 February 2024. The results show significant levels of connectedness for both negative and positive tail risks, highlighting the dynamic and interdependent nature of these markets. Notably, we identify asymmetries in the transmission of tail risks and their key drivers, including oil market volatility and global geopolitical risks. Our findings show that some regions play a pivotal role in the risk dynamics across the regions of the network and the influence of energy source diversity on risk profiles. The study underscores the complexity of managing the expected increase in tail risks in interconnected electricity markets, emphasizing the need for adaptive, forward-thinking strategies tailored to evolving global and local conditions.

Keywords: Electricity markets; Tail risk; TVP-VAR connectedness; Australia; CAViaR (search for similar items in EconPapers)
JEL-codes: D40 L94 Q43 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2024-07-02
New Economics Papers: this item is included in nep-ene, nep-reg and nep-rmg
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Journal Article: Tail risk connectedness in the Australian National Electricity Markets: The impact of rare events (2025)
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