Research

Working papers

  • Jakub Nowotarski, Eran Raviv, Stefan Trueck, Rafal Weron

An Empirical Comparison of Alternate Schemes for Combining Electricity Spot Price Forecasts, August-2013 .

In this paper we investigate the use of forecast averaging for electricity spot prices. While there is an increasing body of literature on the use of forecast combinations, there is only a small number of applications of these techniques in the area of electricity markets. In this comprehensive empirical study we apply seven averaging and one selection scheme and perform a backtesting analysis on day-ahead electricity prices in three major European and US markets. Our findings support the additional benefit of combining forecasts for deriving more accurate predictions, however, the performance is not uniform across the considered markets. Interestingly, equally weighted pooling of forecasts emerges as a viable robust alternative compared with other schemes that rely on estimated combination weights. Overall, we provide empirical evidence that also for the extremely volatile electricity markets, it is beneficial to combine forecasts from various models for the prediction of day-ahead electricity prices. In addition, we empirically demonstrate that not all forecast combination schemes are recommended.

  • Eran Raviv, Kees E. Bouwman, and Dick van Dijk

Forecasting day-ahead electricity prices: utilizing hourly prices, May-2013 .

The daily average price of electricity represents the price of electricity to be delivered over the full next day and serves as a key reference price in the electricity market. It is an aggregate that equals the average of hourly prices for delivery during each of the 24 individual hours. This paper demonstrates that the disaggregated hourly prices contain useful predictive information for the daily average price. Multivariate models for the full panel of hourly prices significantly outperform univariate models of the daily average price, with reductions in Root Mean Squared Error of up to 16%. Substantial care is required in order to achieve these forecast improvements. Rich multivariate models are needed to exploit the relations between different hourly prices, but the risk of overfitting must be mitigated by using dimension reduction techniques, shrinkage and forecast combinations.

  • Eran Raviv

Prediction Bias Correction for Dynamic Term Structure Models, December-2012.

When the yield curve is modelled using an affine factor model, residuals may still contain relevant information and do not adhere to the familiar white noise assumption. This paper proposes a pragmatic way to improve out of sample performance for yield curve forecasting. The proposed adjustment is illustrated via a pseudo out-of-sample forecasting exercise implementing the widely used Dynamic Nelson Siegel model. Large improvement in forecasting performance is achieved throughout the curve for different forecasting horizons. Results are robust to different time periods, as well as to different model specifications.

  • Kees E. Bouwman, Eran Raviv, and Dick van Dijk

An Arithmetic Modeling Framework for the Term Structure of Electricity Prices,latest version May-2012.
We propose a tractable class of arbitrage-free models for the term structure of electricity prices, where spot and forward prices are a linear function of latent factors. The modeling approach offers much flexibility in the specification of the factor dynamics by only restricting their risk-neutral drift. We derive a canonical form where the parameters determining the factor loadings for the forward prices can be separated from the parameters describing the factor dynamics. The factor loading parameters can be consistently estimated by directly fitting the cross-section of forward prices. The modeling framework is applied to a panel of daily prices on forward contracts from the Nordpool electricity market, using affine factor dynamics. We find that forward prices (i) are mainly driven by changes in the level, slope and curvature of the forward curve; (ii) exhibit time-varying volatilities; and (iii) incorporate time-varying forward premia.

Conference presentations

  • 06/2011 – 17th International Conference on Computing in Economics and Finance, San Francisco. 
  • 06/2012 – 35th IAEE International Conference, Perth. 
  • 08/2012 – 66th European Meeting of the Econometric Society, Málaga. 
  • 10/2012 – International Energy Finance conference,Trondheim.
  • 06/2013 – International Symposium on Forecasting, Seoul.
  • 07/2013 – SIRE, Finance and Commodities, St Andrews.