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

  • Rafal Weron
  • Michal Zator

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.

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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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Paper provided by Hugo Steinhaus Center, Wroclaw University of Technology in its series HSC Research Reports with number HSC/13/08.

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Length: 26 pages
Date of creation: 01 Oct 2013
Date of revision:
Handle: RePEc:wuu:wpaper:hsc1308
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