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The hedging performance of electricity futures on the Nordic power exchange

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  • H. N. E. BystrOm

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 volatilities as well as non-normally distributed returns. This article looks at electricity futures and how they can be used for short-term hedging of positions taken in the spot market. It studies 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, and the empirical results indicate some gains from hedging with futures despite the lack of straight-forward arbitrage possibilities in the electricity market. Furthermore, we find a slightly better performance of the simple OLS hedge compared to the conditional hedges.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 35 (2003)
Issue (Month): 1 ()
Pages: 1-11

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Handle: RePEc:taf:applec:v:35:y:2003:i:1:p:1-11

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  1. Kroner, Kenneth F. & Sultan, Jahangir, 1993. "Time-Varying Distributions and Dynamic Hedging with Foreign Currency Futures," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(04), pages 535-551, December.
  2. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-24, April-Jun.
  3. Peter S. Sephton, 1993. "Optimal Hedge Ratios at the Winnipeg Commodity Exchange," Canadian Journal of Economics, Canadian Economics Association, vol. 26(1), pages 175-93, February.
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Cited by:
  1. Liu, Xiaochun & Jacobsen, Brian, 2011. "The Dynamic International Optimal Hedge Ratio," MPRA Paper 35260, University Library of Munich, Germany.
  2. Ángel León & Antonio Rubia, 2002. "Forecasting Time-Varying Covariance Matrices In Intradaily Electricity Spot Prices," Working Papers. Serie AD 2002-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Dungey, Mardi & Henry, Olan T & Hvodzdyk, Lyudmyla, 2013. "The impact of jumps and thin trading on realized hedge ratios," Working Papers 2013-02, University of Tasmania, School of Economics and Finance, revised 28 Mar 2013.
  4. Le Pen, Yannick & Sévi, Yannick, 2007. "Optimal hedging in European electricity forward markets," Economics Papers from University Paris Dauphine 123456789/6808, Paris Dauphine University.
  5. Ciarreta Antuñano, Aitor & Zárraga Alonso, Ainhoa, 2012. "Analysis of volatility transmissions in integrated and interconnected markets: The case of the Iberian and French markets," BILTOKI Biltoki;2012-04, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  6. Hsiang-Tai Lee & Jonathan Yoder, 2005. "A Bivariate Markov Regime Switching GARCH Approach to Estimate Time Varying Minimum Variance Hedge Ratios," Econometrics 0506009, EconWPA.
  7. Frestad, Dennis, 2012. "Liquidity and dirty hedging in the Nordic electricity market," Energy Economics, Elsevier, vol. 34(5), pages 1341-1355.
  8. Fu, Junhui, 2014. "Multi-objective hedging model with the third central moment and the capital budget," Economic Modelling, Elsevier, vol. 36(C), pages 213-219.
  9. Lee, Hsiang-Tai, 2009. "Optimal futures hedging under jump switching dynamics," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 446-456, June.
  10. Jean-Daniel Saphores & Éric Gravel & Jean-Thomas Bernard, 2003. "Environmental Impact Assessment and Investment under Uncertainty: An Application to Power Grid Interconnection," CIRANO Working Papers 2003s-29, CIRANO.
  11. Torro, Hipolit, 2009. "Assessing the influence of spot price predictability on electricity futures hedging," MPRA Paper 18892, University Library of Munich, Germany.

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