Price and volatility interrelationships in the wholesale spot electricity markets of the Central-Western European and Nordic region: a multivariate GARCH approach

Abstract

This paper examines price and volatility interrelationships in five European, day-ahead, wholesale spot electricity markets. These include the French, German, Belgian and Dutch electricity markets, forming the Central-Western European (CWE) region, as well as the Nord Pool Spot electricity market, a pool market for the Nordic region. For this purpose, a novel VAR model with dummy variables was developed to model the conditional mean price, while the CCC-MGARCH model and a DCC-MGARCH model were used to model volatility. The results suggest that evidence of market integration, as measured by cross-mean spillovers and conditional correlation, do exist in the electricity markets under examination. Nevertheless, they also indicate that the CWE electricity markets are stronger integrated, while, on the other hand, weaker integration is observed between them and the Nordic electricity market. We attribute these findings to the fact that physical interconnection capacity is not sufficient for the electricity markets to become fully integrated.