IMF Working Papers

Shocked: Electricity Price Volatility Spillovers in Europe

By Serhan Cevik, Yueshu Zhao

January 10, 2025

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Format: Chicago

Serhan Cevik, and Yueshu Zhao. "Shocked: Electricity Price Volatility Spillovers in Europe", IMF Working Papers 2025, 007 (2025), accessed January 11, 2025, https://doi.org/10.5089/9798400296901.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

European electricity markets are in the midst of unprecedented changes—caused by Russia’s invasion of Ukraine and the rise of renewable sources of energy. Using high-frequency data, this paper investigates volatility spillovers across 24 countries in the European Union (EU) during the period 2014–2024 to provide a better understanding of the transmission of risks in an international context. We develop both a static and a dynamic assessment of spillover effects and directional decomposition between individual countries. Our main findings show that about 73 percent of the forecast error variation is explained by cross-variance shares, which means only 27 percent can be attributed to shocks within each country. In other words, cross-border volatility spillovers dominate the behavior in national electricity markets in Europe—and this effect has grown over time. We also implement an augmented gravity model of bilateral volatility spillovers across power markets in the EU. Altogether, these results provide important insights to policymakers and regulators with regards to greater integration of electricity markets and infrastructure improvements that would also help with the transition to low-carbon sources of power generation and strengthen energy security in Europe.

Subject: Commodities, Electricity, Financial sector policy and analysis, Spillovers

Keywords: Electricity, Electricity market reform, Electricity prices, Europe, Europe, Gravity model, Renewable energy, Spillovers, Spillovers, Volatility

Publication Details

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