Forecasting electricity prices using a RBF neural network With GARCH errors

In this article, we propose a nonlinear forecasting model based on radial basis function neural networks (RBF-NNs) with Gaussian activation functions and robust clustering algorithms to model the conditional mean and a parametric generalized autoregressive conditional heteroskedasticity (GARCH) specification to model the conditional volatility. Instead of calibrating the parameters of the RBF-NNs via numerical simulations, we propose a novel estimation procedure by which the number of basis functions, their corresponding widths and the parameters of the GARCH model are jointly estimated via maximum likelihood along with a genetic algorithm to maximize the likelihood function. We use this model to provide hour-ahead point and direction-of-change forecasts of the Spanish electricity pool prices.