Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches
In this paper, we examine various characteristics of both base and peak electricity spot prices and their returns, and investigate dependence structures, extreme co-movements, risk spillovers, and integration relationships among the five major European electricity markets, including France, Germany,...
| Main Authors: | , , , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2023
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| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/164386 |
| _version_ | 1811697518672609280 |
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| author | Ly, Sel Sriboonchitta, Songsak Tang, Jiechen Wong, Wing-Keung |
| author2 | School of Electrical and Electronic Engineering |
| author_facet | School of Electrical and Electronic Engineering Ly, Sel Sriboonchitta, Songsak Tang, Jiechen Wong, Wing-Keung |
| author_sort | Ly, Sel |
| collection | NTU |
| description | In this paper, we examine various characteristics of both base and peak electricity spot prices and their returns, and investigate dependence structures, extreme co-movements, risk spillovers, and integration relationships among the five major European electricity markets, including France, Germany, the Netherlands, Spain, and the UK. To do so, we propose a new perspective by applying a hybrid of ARMA-GARCH, static and dynamic copulas, and dynamic state-space models with the Kalman filter to address the issue. Based on the results of the ARMA-GJR-GARCH model, we first find that there are spillover effects in the returns of both base and peak spot prices in the five European electricity markets, and there are heteroskedastic, asymmetric, and leverage effects with negative and positive shocks, including spikes and drops during both base and peak load periods. Hence, a decrease in prices will boom the variance of the returns, and a decrease in returns can lead to a much greater increase in volatility. Second, there exist some extents of positive dependencies, tail dependencies, and extreme co-movements among the European electricity markets based on the copula models. In addition, we find that the degree of (tail) dependence and the potential state of market integration are stronger and higher during the peak period than the base period, implying that the European electricity markets could boom or crash together, especially during the peak load period. Further, the results of both the dynamic copulas and dynamic state-space models show that most pairs of the European electricity markets co-move symmetrically and have a time-varying dependence, but do not appear to grow over time. Finally, we provide an application of the copula-GARCH model in estimating and predicting risk spillovers across the five European electricity markets. We document that there are high-risk spillover effects in the European electricity markets because the values of the Conditional Value-at-Risk (CoVaR) are large. Also, we find that the more integrated the market, the more the systematic risk contribution of the market as indicated by ΔCoVaR. Our findings provide useful information regarding the dependence, integration, risk management, and asset pricing for the European electricity markets. |
| first_indexed | 2024-10-01T07:56:32Z |
| format | Journal Article |
| id | ntu-10356/164386 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T07:56:32Z |
| publishDate | 2023 |
| record_format | dspace |
| spelling | ntu-10356/1643862023-01-18T07:37:20Z Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches Ly, Sel Sriboonchitta, Songsak Tang, Jiechen Wong, Wing-Keung School of Electrical and Electronic Engineering Engineering::Electrical and electronic engineering European Electricity Price Copula In this paper, we examine various characteristics of both base and peak electricity spot prices and their returns, and investigate dependence structures, extreme co-movements, risk spillovers, and integration relationships among the five major European electricity markets, including France, Germany, the Netherlands, Spain, and the UK. To do so, we propose a new perspective by applying a hybrid of ARMA-GARCH, static and dynamic copulas, and dynamic state-space models with the Kalman filter to address the issue. Based on the results of the ARMA-GJR-GARCH model, we first find that there are spillover effects in the returns of both base and peak spot prices in the five European electricity markets, and there are heteroskedastic, asymmetric, and leverage effects with negative and positive shocks, including spikes and drops during both base and peak load periods. Hence, a decrease in prices will boom the variance of the returns, and a decrease in returns can lead to a much greater increase in volatility. Second, there exist some extents of positive dependencies, tail dependencies, and extreme co-movements among the European electricity markets based on the copula models. In addition, we find that the degree of (tail) dependence and the potential state of market integration are stronger and higher during the peak period than the base period, implying that the European electricity markets could boom or crash together, especially during the peak load period. Further, the results of both the dynamic copulas and dynamic state-space models show that most pairs of the European electricity markets co-move symmetrically and have a time-varying dependence, but do not appear to grow over time. Finally, we provide an application of the copula-GARCH model in estimating and predicting risk spillovers across the five European electricity markets. We document that there are high-risk spillover effects in the European electricity markets because the values of the Conditional Value-at-Risk (CoVaR) are large. Also, we find that the more integrated the market, the more the systematic risk contribution of the market as indicated by ΔCoVaR. Our findings provide useful information regarding the dependence, integration, risk management, and asset pricing for the European electricity markets. Nanyang Technological University Published version This research has been supported by The Centre of Excellence in Econometrics, Chiang Mai University, Thailand; Nanyang Technological University, Singapore, Kunming University of Science and Technology, China, Asia University, Taiwan, China Medical University Hospital, Taiwan, The Hang Seng University of Hong Kong, Research Grants Council (RGC) of Hong Kong (project numbers UGC/IIDS14/P01/17 and 12500915), and Ministry of Science and Technology, Taiwan (MOST, Project Numbers 106-2410-H-468-002 and 107-2410-H-468-002-MY3), Taiwan. 2023-01-18T07:37:19Z 2023-01-18T07:37:19Z 2022 Journal Article Ly, S., Sriboonchitta, S., Tang, J. & Wong, W. (2022). Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches. Energy Reports, 8, 3827-3846. https://dx.doi.org/10.1016/j.egyr.2022.02.308 2352-4847 https://hdl.handle.net/10356/164386 10.1016/j.egyr.2022.02.308 2-s2.0-85126568424 8 3827 3846 en Energy Reports © 2022 The Authors. Published by Elsevier Ltd. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/). application/pdf |
| spellingShingle | Engineering::Electrical and electronic engineering European Electricity Price Copula Ly, Sel Sriboonchitta, Songsak Tang, Jiechen Wong, Wing-Keung Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title | Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title_full | Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title_fullStr | Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title_full_unstemmed | Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title_short | Exploring dependence structures among European electricity markets: static and dynamic copula-GARCH and dynamic state-space approaches |
| title_sort | exploring dependence structures among european electricity markets static and dynamic copula garch and dynamic state space approaches |
| topic | Engineering::Electrical and electronic engineering European Electricity Price Copula |
| url | https://hdl.handle.net/10356/164386 |
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