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Enron Mail |
Tanya,
While there is seasonal correlations in power, especially for Np-15 and SP-15 (same region), the term structure of correlations can be input. However, the same correlation structure with similar periodicity may not hold between Np-15 and, say, R1B (Neepool), though one would imagine that relationship would still be seasonal (summer/winter), with greater noise. Even if the correlational term structure is to be done for Power, different rules would have to be inputted for different regions. Naveen Tanya Tamarchenko@ECT 10/05/2000 10:42 AM To: Vladimir Gorny/HOU/ECT@ECT, Naveen Andrews/Corp/Enron@ENRON cc: Kirstee Hewitt/LON/ECT@ECT, Debbie R Brackett/HOU/ECT@ECT, Wenyao Jia/HOU/ECT@ECT, Vince J Kaminski/HOU/ECT@ECT Subject: Re: implementing term-structure of correlations for power Vlady & Naveen, I am sending you the factor loadings for power calculated based on the prices from 25-jun-00 to 25-sep-00. They look rather messy. Thus joint estimation of factors for a few regions does not look realistic. Instead we might implement the term structure of correlations. Instead of heaving 1 correlation matrix based on prompt month prices and applying this matrix to all maturities, we can have a number correlation matrices each corresponding to a particular prompt month. I attached the term structure of correlations between R10 and R11 calculated using 5, 4, 3, 2, 1 months of historical forward prices prior to 30-sep-00 with and without decay factor. You can see that: 1) the results are close for 5, 4, and 3 months of history; 2) correlations are periodic with a period of 1 year (this means we can use 12 correlation matrices calculated from first 12 forward contracts and apply these matrices to other forward months); 3) Using decay factor makes the curves a little smoother. Implementation of multiple correlation matrices will not affect the speed of calculations in VAR model significantly. Please, give me your response, Thanks, Tanya.
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