Good volatility, bad volatility: What drives the asymmetric connectedness of Australian electricity markets?

Abstract

Efficient delivery of network services and the electricity infrastructure to meet the long-term consumer's interests are the main objectives and the strategies of a national electricity market, while the main interests of generators are to maximize their profit through pricing strategies. Therefore, the objective of this study is to explore whether electricity prices across the four Australian States display symmetric price volatility connectedness. The study is the first attempt in the literature to make use of intraday 5-minute Australian dispatch electricity prices, spanning the period December 8th, 1998 to May 5th, 2016 to quantify asymmetries in volatility connectedness emerging from good, and bad volatility. The results provide supportive evidence that the Australian electricity markets are connected asymmetrically implying the presence of some degree of market power that is exercised by generators across regional electricity markets.

Dynamic connectedness and integration in cryptocurrency markets

“…In addition to returns connectedness, we investigate asymmetry in the connectedness of cryptocurrency markets. In the broad empirical findings, asset markets usually present asymmetry effects in response to good news and bad news (e.g., Apergis et al, 2017;Barunik et al, 2016). However, there is thus far no clear evidence in the cryptocurrency market to confirm this rule.…”

“…Investors and risk managers can also benefit from building network of connectedness across asset classes to adjust their investment and hedging decisions. Prior studies have uncovered the network of connectedness among and within different assets/markets that include equities (Fowowe and Shuaibu, 2016;Shahzad et al, 2018;, bonds (Louzis, 2015;Ahmad et al, 2018), currencies (Baruní k, et al, 2017;Singh et al, 2018), commodities (Ji et al, 2018a & b;Zhang and Broadstock, 2018), and interest rates (Louzis, 2015). Generally, empirical evidence suggests that connectedness in both return and volatility is significant, time-varying, and is shaped by crisis periods (Shahzad et al, 2018;Zhang and Broadstock, 2018).…”

Interconnectedness in the Australian National Electricity Market: A Higher‐Moment Analysis*

“…The majority of previous studies on electricity volatility spillovers make use of low frequency data (daily or aggregated daily prices) and employ MGARCH models. However, due to the increasing availability of intraday data, recent studies have constructed realized volatility non-parametrically from intraday returns and employed the Yilmaz (2009, 2012) spillover index within a VAR framework (e.g., Han et al 2017;Apergis et al, 2017a). Han et al (2017) found that spillover effects are more pronounced in the physically interconnected regions, exhibiting time and event dependent patterns.…”

“…Han et al (2017) found that spillover effects are more pronounced in the physically interconnected regions, exhibiting time and event dependent patterns. Apergis et al (2017a) applied VAR to quantify asymmetries in volatility spillover emerging from good and bad volatility and showed that Australian regional electricity markets are linked asymmetrically.…”

“…As they note (at p. 384) " if spare import capacity is (not) available, [price] spikes should be smaller (larger) in size as generation capacity from the nearby region can (cannot) be transmitted to meet the local demand." Prior research on electricity price linkages and information transmission in the NEM has identified the existence of spillovers of volatility (or second moment) risk (e.g., Apergis et al, 2017a;Han et al, 2017;Ignatieva and Truck, 2016;Higgs, 2009;Worthington et al, 2005;Higgs and Worthington, 2005). However, focusing on volatility alone ignores that the distribution of electricity prices is skewed and heavily tailed and what this implies for risks due to transmission of extreme events in terms of their magnitude (via skewness spillover) and the likelihood of their occurrence (via kurtosis spillover).…”