Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2024-07-19
Number: 24-049/III
Author-Name: Anne Opschoor
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Dewi Peerlings
Author-Workplace-Name: Vrije Universiteit Amsterdam
Author-Name: Luca Rossini
Author-Workplace-Name: University of Milan
Author-Name: Andre Lucas
Author-Workplace-Name: Vrije Universiteit Amsterdam
Title: Density Forecasting for Electricity Prices under Tail Heterogeneity with the t-Riesz Distribution
Abstract: We introduce the vector-valued t-Riesz distribution for time series models of electricity prices. The t-Riesz distribution extends the well-known Multivariate Student’s t distribution by allowing for tail heterogeneity via a vector of degrees of freedom (DoF) parameters. The closed-form density expression allows for straightforward maximum likelihood estimation. A clustering approach for the DoF parameters is provided to reduce the number of parameters in higher dimensions. We apply the t- Riesz distribution to a 24-dimensional panel of Danish daily electricity prices over the period 2017-2024, considering each hour of the day as a separate coordinate. Results show that multivariate t-Riesz-based density forecasts improve significantly upon the standard Student’s t distribution and the t-copula. Further, the t-Riesz distribution produces superior implied univariate density forecasts during the afternoon for the distribution as a whole and during 8 a.m.- 8 p.m. in its left tail. Moreover, during crisis periods, this effect is even stronger and holds for almost every hour of the day. Finally, portfolio Value-at-Risk forecasts during the central hours of the day improve during crisis periods compared to the classical Student’s t distribution and the t- copula.
Classification-JEL: C1, C22, C53
Keywords: multivariate distributions, (fat)-tail heterogeneity, (inverse) Riesz distribution, electricity prices
File-URL: https://papers.tinbergen.nl/24049.pdf
File-Format: application/pdf
File-Size: 1.569.442 bytes
Handle: RePEc:tin:wpaper:20240049