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The Hedging Performance of Electricity Futures on the Nordic Power Exchange Nord Pool

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  • Byström , Hans

    (Department of Economics, Lund University)

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 are studied.

Suggested Citation

  • Byström , Hans, 2000. "The Hedging Performance of Electricity Futures on the Nordic Power Exchange Nord Pool," Working Papers 2000:15, Lund University, Department of Economics.
    • Handle: RePEc:hhs:lunewp:2000_015
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    More about this item

    Keywords

    electricity prices; hedging.;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • 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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