Volatility spillovers and carbon price in the Nordic wholesale electricity markets
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Date
2024-06
Open Access Location
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier B V
Rights
(c) 2024 The Author/s
CC BY 4.0
CC BY 4.0
Abstract
This paper investigates price volatility and spillovers in the Nordic electricity wholesale markets. We use the Time-Varying Parameter Vector Autoregressive (TVP-VAR), Rolling Window-based VAR (RW-VAR), and high dimensional VAR with common factors (VAR-CF) methods and analyze the integration dynamics among these markets and impact of carbon prices on volatility spillovers. We use 107,352 hourly price data from January 2010 to March 2022. The novelty of this research is four-fold. First, we adopt a connectedness approach to explore volatility interactions among the four Nordic markets, contributing to the scarce literature on volatility in this market. Second, we segment the Norwegian market into southern and northern regions, revealing differences in volatility spillover patterns. Third, we investigate the effect of carbon prices on volatility spillovers and market dynamics. Last, we show significant contribution of covariances to interdependence among markets. We find significant connectedness between the Nordic markets, with an average Total Connectedness Index of between 50% (with a system of variance) and 90% (with a system of both variance and covariance). Sweden is the sole net volatility spillover transmitter, while Denmark experiences the largest shocks from the system. We further find that carbon prices exert a 5% significant impact on the volatility spillover index.
Description
Keywords
Electricity markets, Price volatility, Nord pool, Carbon market, Renewable energy
Citation
Lyu C, Do HX, Nepal R, Jamasb T. (2024). Volatility spillovers and carbon price in the Nordic wholesale electricity markets. Energy Economics. 134.