Modeling Dependence between European Electricity Markets with Constant and Time-varying Copulas

This paper investigates the dependence between electricity spot markets at the heart of Europe including France, Germany, Austria and Switzerland based on copula models. Ten different copulas with both time invariant and varying parameters are considered. The empirical results show that time-varying Student-t copula is the best model to fit the sample data. The positive of upper and lower dependence indicates that spot electricity prices in France, Germany/Austria and Switzerland tend to move in the same direction. Also, the results indicate that the dependence between European electricity markets is time-varying and asymmetric, which means that traditional models such as Pearson's correlation are inappropriate to measure the correlations between these markets.