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Revisiting the relationship between spot and futures prices in the Nord Pool electricity market

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  • Rafal Weron
  • Michal Zator

Abstract

This work discusses potential pitfalls of applying linear regression models for explaining the relationship between spot and futures prices in electricity markets. In particular, the bias coming from the simultaneity problem, the effect of correlated measurement errors and the impact of seasonality on the regression results. Studying a 13-year long (1998-2010) price series of spot and futures prices at Nord Pool and employing regression models with GARCH residuals, we show that the impact of the water reservoir level on the risk premium is positive, which is to be expected, but contradicts the results of Botterud et al. (2010). We also show that after taking into account the seasonality of the water level, the storage cost theory proposed by Botterud et al. (2010) to explain the behavior of convenience yield has only limited support in the data.

Suggested Citation

  • Rafal Weron & Michal Zator, 2013. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," HSC Research Reports HSC/13/08, Hugo Steinhaus Center, Wroclaw University of Technology.
    • Handle: RePEc:wuu:wpaper:hsc1308
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    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_13_08.pdf
    File Function: Original version, 2013; Final version published in Energy Economics 44, 178-190 (2014; doi:10.1016/j.eneco.2014.03.007)
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Electricity market; Spot and futures prices; Risk premium; Convenience yield;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

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