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Are Multifractal Processes Suited to Forecasting Electricity Price Volatility? Evidence from Australian Intraday Data

Author

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  • Mawuli Segnon

    (Westfälische Wilhelms-Universität Münster, Department of Economics (CQE), Germany and Mark E AG, Germany)

  • Chi Keung Lau

    (Newcastle Business School, Department of Economics and Finance, UK)

  • Bernd Wilfling

    (Westfälische Wilhelms-Universität Münster, Department of Economics (CQE), Germany)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

We analyze Australian electricity price returns and find that they exhibit multifractal structures. Consequently, we let the return mean equation follow a long memory smooth transition autoregressive (STAR) process and specify volatility dynamics as a Markov-switching multifractal (MSM) process. We compare the out-of-sample volatility forecasting performance of the STAR-MSM model with that of other STAR mean processes, combined with various conventional GARCH-type volatility equations (for example, STAR-GARCH(1,1)). We find that the STAR-MSM model competes with conventional STAR-GARCH specifications with respect to volatility forecasting, but does not (systematically) outperform them.

Suggested Citation

  • Mawuli Segnon & Chi Keung Lau & Bernd Wilfling & Rangan Gupta, 2017. "Are Multifractal Processes Suited to Forecasting Electricity Price Volatility? Evidence from Australian Intraday Data," Working Papers 201739, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201739
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    More about this item

    Keywords

    Electricity price volatility; multifractal modeling; GARCH processes; volatility forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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