Sources of heteroscedasticity in the spot electricity price time series

Abstract

Spot electricity prices are found to be heteroscedastic in the literature. In this paper I analyze the sources of heteroscedasticity. The heteroscedasticity is measured with the autocorrelation function of the squared residuals. I will show that the heteroscedasticity effect consists of a deterministic and a stochastic part. I decompose the heteroscedasticity of power prices into three factors according to the origin of heteroscedasticity: seasonality; long memory; and GARCH behavior. I model the effects of intraweekly seasonality by using the so-called GEV filtering procedure. After removing the deterministic heteroscedasticity, the remaining heteroscedasticity can be described with a GARCH-type model. Empirical calculations show that seasonality incorporates a negative heteroscedasticity effect, i.e. the magnitude of heteroscedasticity increases after the seasonality filtering procedure.