Work

Forecasting Volatility of the Nordic Electricity Market an Application of the MSGARCH

Year: 2025

Type: article

Abstract: This paper studies the volatility of electricity spot prices in the Nordic market (Sweden, Finland, Denmark, and Norway) under regime switching. Utilizing Markov-switching GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models, we provide strong evidence of nonlinear regime shifts in the volatility dynamics of these prices. Using in-sample criteria, we find that regime-switching models have lower AIC (Akaike information criterion) than single-regime GARCH models. In addition, out-of-sample forecasts indicate that regime-switching GARCH models have superior Value-at-Risk (VaR) prediction ability relative to single-regime models, which is directly pertinent to risk management. These findings highlight the importance of incorporating regime shifts into volatility models for accurately assessing and mitigating risks associated with electricity price fluctuations in deregulated markets.

Source: Risks

DOI: 10.3390/risks13030058

Authors: Muhammad Naeem, Hothefa Shaker Jassim, Kashif Saleem, Maham Fatima

Institutions: University of Central Punjab, Modern College of Business and Science, University of Wollongong in Dubai

Language: English

Topic: Financial Risk and Volatility Modeling

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Climate action

Open Access status: gold

Estimated APC paid: $2,172