Dynamic Conditional Correlation between Electricity and Stock markets during the Financial Crisis in Greece

TL;DR

This paper investigates the dynamic correlation and volatility spillover between electricity and stock markets in Greece during the financial crisis, revealing structural changes linked to economic fundamentals and regulatory shifts.

Contribution

It applies a DCC-GARCH model to analyze the evolving correlation patterns between electricity and financial markets during a crisis period in Greece, highlighting contagion effects.

Findings

Structural changes in correlation patterns identified

Volatility spillover observed during the crisis

Correlation linked to economic fundamentals and regulation

Abstract

Liberalization of electricity markets has increasingly created the need for understanding the volatility and correlation structure between electricity and financial markets. This work reveals the existence of structural changes in correlation patterns among these two markets and links the changes to both fundamentals and regulatory conditions prevailing in the markets, as well as the current European financial crisis. We apply a Dynamic Conditional Correlation (DCC) GARCH model to a set of market s fundamental variables and Greece s financial market and microeconomic indexes to study their interaction. Emphasis is given on the period of severe financial crisis of the Country to understand contagion and volatility spillover between these two markets.