Are multifractal processes suited to forecasting electricity price volatility? Evidence from Australian intraday data

Segnon Mawuli (), Chi Keung Lau, Bernd Wilfling and Rangan Gupta
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Segnon Mawuli: Westfälische Wilhelms-Universität, Münster, Germany

Studies in Nonlinear Dynamics & Econometrics, 2022, vol. 26, issue 1, 73-98

Abstract: We analyze Australian electricity price returns and find that they exhibit volatility clustering, long memory, structural breaks, and multifractality. Consequently, we let the return mean equation follow two alternative specifications, namely (i) a smooth transition autoregressive fractionally integrated moving average (STARFIMA) process, and (ii) a Markov-switching autoregressive fractionally integrated moving average (MSARFIMA) process. We specify volatility dynamics via a set of (i) short- and long-memory GARCH-type processes, (ii) Markov-switching (MS) GARCH-type processes, and (iii) a Markov-switching multifractal (MSM) process. Based on equal and superior predictive ability tests (using MSE and MAE loss functions), we compare the out-of-sample relative forecasting performance of the models. We find that the (multifractal) MSM volatility model keeps up with the conventional GARCH- and MSGARCH-type specifications. In particular, the MSM model outperforms the alternative specifications, when using the daily squared return as a proxy for latent volatility.

Keywords: electricity price volatility; GARCH-type processes; Markov-switching processes; multifractal modeling; volatility forecasting (search for similar items in EconPapers)
JEL-codes: C22 C52 C53 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Are multifractal processes suited to forecasting electricity price volatility? Evidence from Australian intraday data (2017)
Working Paper: Are Multifractal Processes Suited to Forecasting Electricity Price Volatility? Evidence from Australian Intraday Data (2017)
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DOI: 10.1515/snde-2019-0009

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