Subject: Re: implementing term-structure of correlations for power
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Date: Thu, 5 Oct 2000 07:48:00 -0700 (PDT)

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.