Dynamic Conditional Correlation between Electricity, Energy (Commodity) and Financial Markets during the Financial Crisis in Greece

Panagiotis G Papaioannou,Akylas Stratigakos,Christos Dikaiakos,Kostas Sietos,George P Papaioannou

doi:10.4236/jmf.2017.74055

Abstract

Liberalization of electricity markets has increasingly created the need for understanding the volatility and correlation structure between electricity, financial and energy commodity markets. This work reveals the existence of structural changes in correlation patterns among these markets and links the changes to both fundamentals and regulatory conditions prevailing in the markets, as well as the current European financial crisis. We apply a Dynamic Conditional Correlation (DCC) GARCH model to a set of market’s fundamental variables, related commodity markets and Greece’s financial market and microeconomic indexes to study their interaction. Emphasis is given on the period of severe financial crisis of the Country to understand “contagion” and volatility spillover between these markets. This approach enables us to capture the changing co-movement of assets within and between markets (financial, commodity, electricity) as market conditions change. The main results are that there is strong evidence of volatility spillover (or co-volatility) between financial and commodity market, while the Greek electricity market seems to be almost “isolated” from these two markets.

Highlights

In the financial and Commodity markets, conditional volatility models have found an extensive application
Regarding the correlation between ase and stoxx indexes, as shown in Figure 12, it evolved significantly over the period of our sample, with a peak value at the time around the Lehman Brother’s collapse and a gradually decrease in the afterwards. Another peak was found in 2010 in the midst of the Greek Sovereign Debt crisis, and in recent years the correlations fluctuate at a lower level. These findings clearly show the effect of the 2 periods of crisis in our sample, since correlations present an upward “jump” in both periods, suggesting that the links between financial assets become stronger in times of stress, confirming the works of others (Kenourgios D., et al 2011) [59]
In this paper we have investigated the pairwise dynamics of return conditional correlation between assets “belonging” to three markets, namely electricity, energy commodity and financial

Summary

Introduction

In the financial and Commodity markets, conditional volatility models have found an extensive application. The transmission of price volatilities between two natural gas markets, the British and Belgium ones, is investigated by Bermejo-Apricio et al, (2008) [1]. They applied GARCH (1,1) and EGARCH (1,1) for the univariate case and a DCC and BEKK F. et al 1995 [2]) for the bivariate case, on deseasonalized daily prices of National Balancing Point (NBP) and Zeebrugge Hubs. They took into consideration the Interconnector gas pipeline’s used capacity as an exogenous variable for the conditional variance. The main conclusion in their paper is that the Interconnector gas pipeline impacts strongly the conditional variance of NBP and Zeebrugge, resulting in an increase of the volatility linkage between the two markets when 50% or more of the pipeline’s total capacity is used

Results

Discussion

Conclusion