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Forecasting spot price volatility using the short-term forward curve

Erik Haugom and Carl J. Ullrich

Energy Economics, 2012, vol. 34, issue 6, 1826-1833

Abstract: We use high frequency real time spot prices and day-ahead forward prices from the Pennsylvania–New Jersey–Maryland wholesale electricity market to calculate, describe, and forecast spot price volatility. We introduce the concept of forward realized volatility calculated from day-ahead forward prices. Forward realized volatility improves forecasts of spot price volatility – in the sense of higher R2s and significantly lower forecast errors – when compared with forecasts based solely upon historical volatility. The largest forecast improvements obtained when the change in forward realized volatility is large in magnitude. Splitting total volatility into its continuous and jump components is crucial for forecasting volatility at weekly and monthly horizons.

Keywords: Volatility forecasting; Realized volatility; Implied volatility; Forward prices; Electricity markets (search for similar items in EconPapers)
JEL-codes: G17 C52 C14 Q47 L94 (search for similar items in EconPapers)
Date: 2012
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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