Forecasting Electricity Market Risk Using Empirical Mode Decomposition (EMD)—Based Multiscale Methodology

Kaijian He, Hongqian Wang, Jiangze Du and Yingchao Zou
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Kaijian He: School of Business, Hunan University of Science and Technology, Xiangtan 411201, China
Hongqian Wang: Payment and Settlement Department, Software Center, Bank of China, Beijing 100094, China
Jiangze Du: School of Finance, Jiangxi University of Finance and Economics, Nanchang 330013, China
Yingchao Zou: College of Information Science and Technology, Beijing University of Chemical Technology, Beijing 100029, China

Energies, 2016, vol. 9, issue 11, 1-11

Abstract: The electricity market has experienced an increasing level of deregulation and reform over the years. There is an increasing level of electricity price fluctuation, uncertainty, and risk exposure in the marketplace. Traditional risk measurement models based on the homogeneous and efficient market assumption no longer suffice, facing the increasing level of accuracy and reliability requirements. In this paper, we propose a new Empirical Mode Decomposition (EMD)-based Value at Risk (VaR) model to estimate the downside risk measure in the electricity market. The proposed model investigates and models the inherent multiscale market risk structure. The EMD model is introduced to decompose the electricity time series into several Intrinsic Mode Functions (IMF) with distinct multiscale characteristics. The Exponential Weighted Moving Average (EWMA) model is used to model the individual risk factors across different scales. Experimental results using different models in the Australian electricity markets show that EMD-EWMA models based on Student’s t distribution achieves the best performance, and outperforms the benchmark EWMA model significantly in terms of model reliability and predictive accuracy.

Keywords: Empirical Mode Decomposition (EMD); electricity market risk; Value at Risk (VaR); Exponential Weighted Moving Average (EWMA) (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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