Forecasting the Volatility of Electricity Prices by Robust Estimation: An Application to the Italian Market

Volatility of electricity prices has been often estimated through GARCHtype models which can be strongly affected by the presence of extreme observations. Although the presence of spikes is a well-known stylized effect observed on electricity markets, robust volatility estimators have not been applied so far. In this paper we try to fill this gap by suggesting a robust procedure to the study of the dynamics of electricity prices. The conditional mean of de-trended and seasonally adjusted prices is modeled through a robust estimator of SETAR processes based on a polynomial weighting function while a robust GARCH is used for the conditional variance. The robust GARCH estimator relies on the extension of the forward search by Crosato and Grossi. The robust SETAR-GARCH model is applied to the Italian day-ahead electricity market using data in the period spanning from 2013 to 2015.