Humboldt-Universität zu Berlin - High Dimensional Nonstationary Time Series

IRTG1792DP2018 017

Regularization Approach for Network Modeling of German Energy Market

Shi Chen
Wolfgang Karl Härdle
Brenda López Cabrera

We investigate the concept of connectedness, which is important for risk
measurement and management inGerman energy market. Understanding and
learning from these mechanisms are essential to avoid future systemic disasters.
To deal with large portfolio selection, we propose regularization approach
to capture the spillover and contagion effects acrossGerman power derivatives.
This paper shows how network analysis can facilitate the monitoring of futures
price movements. Our methodology combines high-dimensional variable selection
techniques with network analysis, the results show that contracts like
Phelix Base Year Options and Phelix Peak Year Futures are in the core of the
Energy futures market.

regularization, energy risk transmission, network, German energy market

JEL classification:
C1, Q41, Q47