Linear time-varying regression with copula–DCC–asymmetric–GARCH models for volatility: the co-movement between industrial electricity demand and financial factors

Yunsun Kim, Sun Young Hwang, Jong Min Kim, Sahm Kim

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the dependence structure of industrial electricity demand and financial indicators (the Korea Composite Stock Price Index [KOSPI], Korean Securities Dealers Automated Quotations [KOSDAQ], exchange rate, government bonds and exports) using the copula dynamic conditional correlation with symmetric and asymmetric generalized autoregressive conditional heteroscedasticity (GARCH) models to forecast volatility. We investigated symmetric and asymmetric GARCH types, such as the standard, exponential, Glosten–Jagannathan–Runkle and asymmetric power models to fit the marginal distribution. The two types of elliptical copula, Gaussian and Student’s t-distributions, were also considered to investigate the tail dependence between financial and electricity time series. We analysed the monthly log returns for January 2002 to April 2020. The empirical results reveal that the best-fit models for the Akaike information criteria are the asymmetric GARCH models, specifically the exponential-GARCH (E-GARCH). Moreover, the asymmetric GARCH model is superior to the symmetric GARCH in terms of forecast volatility. Extreme tail dependence exists for the KOSDAQ and exports indicators with the electricity demand. The KOSPI, Korea’s primary stock market, is the best-fit financial variable and presents the highest forecasting accuracy.

Original languageEnglish (US)
Pages (from-to)255-272
Number of pages18
JournalApplied Economics
Volume55
Issue number3
DOIs
StatePublished - 2023

Bibliographical note

Funding Information:
The work was supported by the Korea Institute of Energy Technology Evaluation and Planning [20199710100060]; National Research Foundation of Korea [2021R1F1A1047952].

Publisher Copyright:
© 2022 Informa UK Limited, trading as Taylor & Francis Group.

Keywords

  • C22
  • Copula
  • E43
  • E44
  • GARCH
  • dynamic conditional correlation
  • time-Varying correlation
  • volatility

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