Forecasting Spot Price Volatility Using the Short-Term Forward Curve

24 Pages Posted: 5 Dec 2010 Last revised: 27 Jan 2011

See all articles by Erik Haugom

Erik Haugom

affiliation not provided to SSRN

Carl J. Ullrich

James Madison University - College of Business; Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law

Date Written: December 3, 2010

Abstract

This paper uses high-frequency real-time spot prices and day-ahead forward prices from the eastern hub of the Pennsylvania-New Jersey-Maryland (PJM) electricity market to calculate, describe, and forecast realized spot price volatility. Using Heterogeneous Autoregressive models of realized volatility (HAR-RV) we find that, as in financial markets, electricity volatility is persistent. We extend the literature by incorporating volatility implied by day-ahead forward prices (forward implied volatility) into our forecasts of future spot price volatility. Including forward implied volatility improves forecasts of spot price volatility - in the sense of higher R-squareds and lower forecast errors.

Keywords: Volatility forecasting, realized volatility, implied volatility, forward prices, electricity markets

JEL Classification: G17, C52, C14, Q47, L94

Suggested Citation

Haugom, Erik and Ullrich, Carl J., Forecasting Spot Price Volatility Using the Short-Term Forward Curve (December 3, 2010). Available at SSRN: https://ssrn.com/abstract=1719762 or http://dx.doi.org/10.2139/ssrn.1719762

Erik Haugom

affiliation not provided to SSRN ( email )

Carl J. Ullrich (Contact Author)

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States

Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law ( email )

1016 Pamplin Hall (0221)
Blacksburg, VA 24060-0221
United States

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