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Multinational Electricity Market Integration and Electricity Price Dynamics

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  • Lundgren, Jens

    ()
    (Department of Economics)

  • Hellström, Jörgen

    ()
    (Department of Economics)

  • Rudholm, Niklas

    ()
    (The Swedish Retail Institute)

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    Abstract

    The paper empirically explores the electricity price dynamics in the Nordic electricity market, Nord Pool. In particular, the focus is on determining what effect the multinational market integration, during the years 1996-2006, has had on the conditional mean electricity price, its volatility, the price jump-intensity and the price jump size. Empirically the study reveals that the conditional mean electricity price increased when Finland joined the Nord Pool exchange, and the price remained at the higher level when Denmark also joined. Turning to the price volatility, this increased when Finland joined, mainly due to an increase in jump size, and decreased when Denmark also joined Nord Pool. However, the price jump-intensity decreased both when Finland and Denmark joined the market. This means that a large electricity market integration in Scandinavia seems to reduce the probability of sudden price jumps. That is, the multinational electricity market integration in Scandinavia seems to have created a market that handles external shocks to supply and demand better than the separate national electricity markets previous did.

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    Bibliographic Info

    Paper provided by HUI Research in its series HUI Working Papers with number 16.

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    Length: 24 pages
    Date of creation: 15 Apr 2008
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    Publication status: Published as Lundgren, Jens, Jörgen Hellström and Niklas Rudholm, 'Multinational Electricity Market Integration and Electricity Price Dynamics' in Proceedings of the EEM 2008 - 5th International Conference on the European Electricity Market, 2008.
    Handle: RePEc:hhs:huiwps:0016

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    Related research

    Keywords: Electricity price; market integration; jump risk; EGARCH; Exponential Autoregressive conditional Jump Intensity;

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    References

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    1. Guthrie, Graeme & Videbeck, Steen, 2007. "Electricity spot price dynamics: Beyond financial models," Energy Policy, Elsevier, vol. 35(11), pages 5614-5621, November.
    2. Peter Fortune, 1999. "Are stock returns different over weekends? a jump diffusion analysis of the "weekend effect"," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-19.
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    5. Christopher J. Neely, 1998. "Target zones and conditional volatility: the role of realignments," Working Papers 1994-008, Federal Reserve Bank of St. Louis.
    6. Mikael Bask & Jens Lundgren & Niklas Rudholm, 2009. "Market power in the expanding Nordic power market," Applied Economics, Taylor & Francis Journals, vol. 43(9), pages 1035-1043.
    7. Sanjiv R. Das, 1998. "Poisson-Guassian Processes and the Bond Markets," NBER Working Papers 6631, National Bureau of Economic Research, Inc.
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    9. Amundsen, Eirik S. & Bergman, Lars, 2006. "Why has the Nordic electricity market worked so well?," Utilities Policy, Elsevier, vol. 14(3), pages 148-157, September.
    10. Byström, Hans, 2001. "Extreme Value Theory and Extremely Large Electricity Price Changes," Working Papers 2001:19, Lund University, Department of Economics.
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    12. Girod, Jacques & Bourbonnais, Régis & Keppler, Jan Horst, 2007. "The Econometrics of Energy Systems," Economics Papers from University Paris Dauphine 123456789/120, Paris Dauphine University.
    13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    14. Amundsen, Eirik S. & Bergman, Lars & Andersson, Bo, 1998. "Competition and Prices on the Emerging Nordic Electricity Market," Working Paper Series in Economics and Finance 217, Stockholm School of Economics.
    15. Chan, Wing H & Maheu, John M, 2002. "Conditional Jump Dynamics in Stock Market Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 377-89, July.
    16. Hjalmarsson, Erik, 2000. "Nord Pool: A Power Market Without Market Power," Working Papers in Economics 28, University of Gothenburg, Department of Economics.
    17. Amundsen, E.S. & Bergman, L. & Andersson, B., 1998. "Competition and Prices on the Emerging Nordic Electricity Market," Norway; Department of Economics, University of Bergen 0298, Department of Economics, University of Bergen.
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    Citations

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    Cited by:
    1. Bask, Mikael & Widerberg, Anna, 2008. "Market Structure and the Stability and Volatility of Electricity Prices," Working Papers in Economics 327, University of Gothenburg, Department of Economics.
    2. Creti, Anna & Fumagalli, Eileen & Fumagalli, Elena, 2010. "Integration of electricity markets in Europe: Relevant issues for Italy," Energy Policy, Elsevier, vol. 38(11), pages 6966-6976, November.
    3. Hellström, Jörgen & Lundgren, Jens & Yu, Haishan, 2012. "Why do electricity prices jump? Empirical evidence from the Nordic electricity market," Energy Economics, Elsevier, vol. 34(6), pages 1774-1781.
    4. Ochoa, Camila & Dyner, Isaac & Franco, Carlos J., 2013. "Simulating power integration in Latin America to assess challenges, opportunities, and threats," Energy Policy, Elsevier, vol. 61(C), pages 267-273.

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