Using a Rolling Vector Error Correction Model to Model Static and Dynamic Causal Relations between Electricity Spot Price and Related Fundamental Factors: The Case of Greek Electricity Market

George P. Papaioannou, Christos Dikaiakos, Akylas Stratigakos, Anargyros Dramountanis, Antonio T. Alexandridis

Abstract


The purpose of this study is to investigate short and long run relationships between electricity spot prices in Greece, Brent oil, natural gas, lignite fuel cost and carbon allowances using daily data from 2007 to 2014. Static and dynamic Johansen test are applied in order to identify long run relations and also to assess the evolution over time in the level of cointegration. Additionally we test for Granger Causality in a Vector error correction model and embrace impulse response and variance decomposition techniques to model the dynamic response of electricity prices in excitation of another variable. Overall our results suggest an important long run relation between spot electricity prices in Greece, natural gas price and carbon allowances, while in the short run electricity prices are not affected by any of the other variables, results that are of practical importance for the market regulator as well as the wholesale market participants.

Keywords:  Vector Error Correction, Electricity Markets, Fuel Markets
JEL Classifications: C4, C5 & C8

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