Forecasting Spot Price Volatility Using the Short-Term Forward Curve
24 Pages Posted: 5 Dec 2010 Last revised: 27 Jan 2011
Date Written: December 3, 2010
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
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