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Modeling electricity spot and futures price dependence: A multifrequency approach

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  • Malo, Pekka

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.

Suggested Citation

  • Malo, Pekka, 2009. "Modeling electricity spot and futures price dependence: A multifrequency approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(22), pages 4763-4779.
    • Handle: RePEc:eee:phsmap:v:388:y:2009:i:22:p:4763-4779
    DOI: 10.1016/j.physa.2009.07.048
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    References listed on IDEAS

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    Cited by:

    1. Ladislav KRISTOUFEK & Petra LUNACKOVA, 2013. "Long-term Memory in Electricity Prices: Czech Market Evidence," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 63(5), pages 407-424, November.
    2. Zorana Božić & Dušan Dobromirov & Jovana Arsić & Mladen Radišić & Beata Ślusarczyk, 2020. "Power Exchange Prices: Comparison of Volatility in European Markets," Energies, MDPI, vol. 13(21), pages 1-15, October.
    3. Fan, Qingju & Li, Dan, 2015. "Multifractal cross-correlation analysis in electricity spot market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 17-27.
    4. Rypdal, Martin & Løvsletten, Ola, 2013. "Modeling electricity spot prices using mean-reverting multifractal processes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(1), pages 194-207.
    5. Bazmi, Aqeel Ahmed & Zahedi, Gholamreza, 2011. "Sustainable energy systems: Role of optimization modeling techniques in power generation and supply—A review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(8), pages 3480-3500.
    6. Martin Rypdal & Ola L{o}vsletten, 2012. "Modeling electricity spot prices using mean-reverting multifractal processes," Papers 1201.6137, arXiv.org.

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