Application of bagging in day-ahead electricity price forecasting and factor augmentation

The electricity price forecasting (EPF) is a challenging task not only because of the uncommon characteristics of electricity but also because of the existence of many potential predictors with changing predictive abilities over time. In such an environment, how to account for all available factors and extract as much information as possible is the key to the production of accurate forecasts. To address this long-standing issue in a way that balances complexity and forecasting accuracy while facilitating the traceability of the predictor selection procedure, we propose the method of Bootstrap Aggregation (bagging). To forecast day-ahead electricity prices in a multivariate context for six major power markets, we construct a large-scale pure price model and apply the bagging approach in comparison with the popular Least Absolute Shrinkage and Selection Operator (LASSO) estimation method. Our forecasting study reveals that bagging provides substantial forecast improvements on daily and hourly scales in almost all markets over the popular LASSO estimation method. The differentiation in the forecast performances of the two approaches appears to arise, inter alia, from their structural differences in the explanatory variables selection process. Moreover, to account for the intraday hourly dependencies of day-ahead electricity prices, all our models are augmented with latent factors, and a substantial improvement is observed only in the forecasts from models covering a relatively limited number of predictors.