In this comprehensive empirical study we critically evaluate the use of forecast averaging in the context of electricity prices. We apply seven averaging and one selection scheme and perform a backtesting analysis on day-ahead electricity prices in three major European and US markets. Our findings support the additional benefit of combining forecasts of individual methods for deriving more accurate predictions, however, the performance is not uniform across the considered markets and periods. In particular, equally weighted pooling of forecasts emerges as a simple, yet powerful technique compared with other schemes that rely on estimated combination weights, but only when there is no individual predictor that consistently outperforms its competitors. Constrained least squares regression (CLS) offers a balance between robustness against such well performing individual methods and relatively accurate forecasts, on average better than those of the individual predictors. Finally, some popular forecast averaging schemes - like ordinary least squares regression (OLS) and Bayesian Model Averaging (BMA) - turn out to be unsuitable for predicting day-ahead electricity prices.

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Keywords ARX model, Constrained least squares regression, Day-ahead market, Electricity price forecasting, Forecast combination
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Journal Energy Economics
Nowotarski, J, Raviv, E, Trück, S, & Weron, R. (2014). An empirical comparison of alternative schemes for combining electricity spot price forecasts. Energy Economics, 46, 395–412. doi:10.1016/j.eneco.2014.07.014