Policy uncertainty and volatility spillovers in European electricity markets: Implications for market dynamics and innovation

In the evolving European energy landscape, it is essential to deepen our understanding of the interplay between electricity markets, volatility, and policy uncertainty. This paper investigates volatility spillovers across 11 European electricity markets and examines how three distinct policy uncertainty indices - economic, energy, and environmental - affect these spillovers. We employ three advanced econometric approaches to assess how the interconnected European market receives and transmits volatility. Furthermore, we analyze the influence of policy uncertainty on volatility transmission across markets using both linear and quantile regression models, allowing us to capture dynamics across different time horizons and market conditions. Our findings reveal significant fluctuations in volatility spillovers, both in the short-term and long-term market. An increase in all three policy uncertainty indices reduce short-term spillovers while energy policy uncertainty increases long-term volatility. This effect highlights the complex relationship between policy uncertainty and electricity market dynamics in Europe. The study provides crucial insights for policymakers and market participants, highlighting the need for strategic risk management and coordinated policy frameworks to mitigate the impacts of volatility and enhance market stability. Lastly, this research contributes to a deeper understanding of how policy uncertainty shapes the evolving European electricity markets. • We examine volatility spillovers in 11 interconnected EU electricity markets. • We combine time, frequency, and quantile connectedness for multi-method analysis. • Economic, energy, and environmental policy uncertainty impact spillovers differently. • Volatility spillovers intensify in high-volatility and post-crisis market periods. • The three policy uncertainty indices show varying short- and long-term effects.