Evaluating multivariate GARCH models in the Nordic electricity markets

This paper considers a variety of specification tests for multivariate GARCH models that are used in dynamic hedging in the electricity markets. The test statistics include the robust conditional moments tests for sign-size bias along with the recently introduced copula tests for an appropriate dependence structure. We consider this effort worthwhile, since quite often the tests of multivariate GARCH models are easily omitted and the models become selected ad-hoc depending on the results they generate. Hedging performance comparisons, in terms of unconditional and conditional ex-post variance portfolio reduction, are conducted. (orig.)