New paper on Common and idiosyncratic conditional volatility

Our latest paper titled “Common and idiosyncratic conditional volatility: Theory and empirical evidence from electricity prices” has been published on Econometric Reviews. The paper is the result of a work in collaboration with Prof. Francisco Blasques and Prof. Siem Jan Koopman, from the Department of Econometrics (Vrije Universiteit, Amsterdam) and Tinbergen Institute, Amsterdam.

We propose and develop a robust score-driven multiplicative dynamic factor model for the conditional volatility of electricity prices. This model effectively identifies both common and idiosyncratic conditional volatility factors in the spot prices of electricity across key Nord Pool European markets. By employing a single observation-driven filter that is both simple and parsimonious, we can extract these factors efficiently.

Our model is well-suited for high-dimensional applications and avoids the curse of dimensionality. The parsimonious observation-driven filter simplifies computations for parameter estimation and factor signal extraction. We derive the filter’s stochastic properties, showing bounded moments, stationarity, ergodicity, and invertibility. Additionally, we establish the consistency and asymptotic normality of the maximum likelihood estimator.

We find significant differences in common and idiosyncratic volatilities between net-import and net-export electricity markets and, notably, the former are more exposed to cross-market volatility spillovers, which we quantify in our study.

The abstract of the article is available here.

To cite: Blasques, F., D’Innocenzo, E., & Koopman, S. J. (2024). Common and idiosyncratic conditional volatility: Theory and empirical evidence from electricity prices. Econometric Reviews, 1–33.

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