A TARCH examination of the return volatility–volume relationship in electricity futures

Abstract

Four electricity futures markets on NYMEX between 1996 and 1999 are examined using a TARCH model. The evidence suggests traders had an asymmetric reaction to new information. Evidence also is found for a correlation between futures returns and trading volume in two markets (COB and PV).

Notes

¹ To be discussed in more detail in the next section. Other models, such as that of Blume et al . (1994) also exist. In their model, information quality is also important and is distinct from volume.

² For example, approximately 20 traders held positions at any one time in the NYMEX futures markets in 1997, while more than 200 held positions in the US Treasury Bond market on the Chicago Board of Trade (CFTC, 2004).

³ See Borenstein (2002) for an excellent exposition of the primary features and implications of supply and demand in electricity markets.

⁴ In the empirical results reported later, lagged values of R_t were added to the mean equation to correct for autocorrelation as identified by inspection of the Ljung–Box Q-statistics. This correction had, generally, minor effect on the ARCH and GARCH terms.