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Measuring Model Risk in the European Energy Exchange

In: Handbook of Recent Advances in Commodity and Financial Modeling

Author

Listed:
  • Angelica Gianfreda

    (University of Milano-Bicocca)

  • Giacomo Scandolo

    (University of Firenze)

Abstract

It has been shown that model risk has an important effect on any risk measurement procedures, hence its proper quantification is becoming crucial especially in energy markets, where market participants face several kinds of risks (such as volumetric, liquidity, and operational risk). Therefore, relaxing the assumption of normality and using a wide range of alternative distributions, we quantify the model risk in the German wholesale electricity market (the European Energy Exchange, EEX) by studying day–ahead electricity prices from 2001 to 2013 using the well-established setting of GARCH–type models. Taking advantage of this long price history, we investigate the “time evolution” of the measured model risk across years by adopting a rolling window procedure. Our results confirm that the increasing complexity of energy markets has affected the stochastic nature of electricity prices which have become progressively less normal through years, hence resulting in an increased model risk.

Suggested Citation

  • Angelica Gianfreda & Giacomo Scandolo, 2018. "Measuring Model Risk in the European Energy Exchange," International Series in Operations Research & Management Science, in: Giorgio Consigli & Silvana Stefani & Giovanni Zambruno (ed.), Handbook of Recent Advances in Commodity and Financial Modeling, chapter 0, pages 89-110, Springer.
    • Handle: RePEc:spr:isochp:978-3-319-61320-8_5
    DOI: 10.1007/978-3-319-61320-8_5
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    Cited by:

    1. Billé, Anna Gloria & Gianfreda, Angelica & Del Grosso, Filippo & Ravazzolo, Francesco, 2023. "Forecasting electricity prices with expert, linear, and nonlinear models," International Journal of Forecasting, Elsevier, vol. 39(2), pages 570-586.

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