Forecasting Energy Value at Risk Using Multiscale Dependence Based Methodology

Abstract

In this paper, we propose a multiscale dependence-based methodology to analyze the dependence structure and to estimate the downside portfolio risk measures in the energy markets. More specifically, under this methodology, we formulate a new bivariate Empirical Mode Decomposition (EMD) copula based approach to analyze and model the multiscale dependence structure in the energy markets. The proposed model constructs the Copula-based dependence structure formulation in the Bivariate Empirical Mode Decomposition (BEMD)-based multiscale domain. Results from the empirical studies using the typical Australian electricity daily prices show that there exists a multiscale dependence structure between different regional markets across different scales. The proposed model taking into account the multiscale dependence structure demonstrates statistically significantly-improved performance in terms of accuracy and reliability measures.