Modelling and Forecasting Volatility on Electric Power Exchange SEEPEX

Abstract

Research Question: The launch and the beginning of trade on the South East Electric Power Exchange (SEEPEX) in Belgrade, early in 2016, opened the issue of forecasting volatility and price movements in the market. Motivation: The issue is of vital importance for all market actors for the purpose of maximising profits, reducing risks, planning production and making investment decisions. Forecasting volatility and price movements in electric power markets is important for traders with profit maximisation and yield-to-risk ratio optimisation in mind and, equally, for producers, large industrial consumers, investors and portfolio managers. Idea: Exploring models and techniques to forecast volatility in electricity markets and subsequently testing statistical methods based on time series data, the ARMA-GARCH being the preferred model, with a view to identifying optimal methods for this market. The volatility of the power market and price movements have been tested during a given period. The results can be used to gauge market parameters and opportunities to extrapolate future volatility and movements in electricity prices. Data: For the purposes of this analysis, a time series involving price movements and trade volumes were used, covering a period between the SEEPEX trade launch and the end of 2019. Tools: In the empirical part of the paper, "Stata 13" statistical and econometric software was used to explore stylised facts and model the volatility of SEEPEX electricity price returns. Findings: The authors offer an overview of different methods used in the research, having selected different specifications of the ARMA-GARCH model as the most reliable in predicting volatility in the given market. The exponential GARCH model with student-t error distribution is believed to have provided the best overall performance in modelling the SEEPEX return volatility, as well as the best volatility forecast. Contribution: This is one of the first empirical studies of the Serbian power market that deals with risk modelling. Forecasting time-varying electricity exchange volatility is important for all market participants interested in variance forecasts to be used to calculate risk and hedging measures.