The Hedging Performance of Electricity Futures on the Nordic Power Exchange Nord Pool
AbstractThe 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 are studied.
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Bibliographic InfoPaper provided by Lund University, Department of Economics in its series Working Papers with number 2000:15.
Length: 22 pages
Date of creation: 28 Sep 2000
Date of revision:
Publication status: Published in Applied Economics, 2003, pages 1-11.
Contact details of provider:
Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
Web page: http://www.nek.lu.se/
More information through EDIRC
electricity prices; hedging.;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- Q49 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Other
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