Working Papers, Department of Economics, Lund University
The Hedging Performance of Electricity Futures on the Nordic Power Exchange Nord Pool
Abstract: The Nordic Power Exchange (Nord Pool), the first
multinational exchange for electricity trading, has existed since January
1996. Spot and futures contracts are traded on this exchange and its
typical characteristics are very high volatility as well as non-normally
distributed returns. In this paper I look at electricity futures and how
they can be used for short term hedging in the spot market. I study the
minimum variance hedge ratio and how it can be estimated in different ways.
The traditional naive hedge and the OLS hedge are compared out-of-sample to
more elaborate moving average and GARCH hedges. The empirical results
indicate some gains from hedging with futures despite the lack of
straight-forward arbitrage possibilities in the electricity market.
Furthermore, I find that the relative performance of the different variance
minimizing hedges depends on whether unconditional or conditional variances
Keywords: electricity prices; hedging.; (follow links to similar papers)
JEL-Codes: C22; C53; G13; Q49; (follow links to similar papers)
22 pages, September 28, 2000
- This paper is published as:
Byström, Hans, (2003), 'The Hedging Performance of Electricity Futures on the Nordic Power Exchange Nord Pool', Applied Economics, Vol. 35, pages 1-11
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