The hedging performance of electricity futures on the Nordic power exchange
Author
Summary, in English
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 volatilities as well as non-normally distributed returns. This article looks at electricity futures and how they can be used for short-term hedging of positions taken in the spot market. It studies 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, and the empirical results indicate some gains from hedging with futures despite the lack of straight-forward arbitrage possibilities in the electricity market. Furthermore, we find a slightly better performance of the simple OLS hedge compared to the conditional hedges.
Department/s
Publishing year
2003
Language
English
Pages
1-11
Publication/Series
Applied Economics
Volume
35
Issue
1
Links
Document type
Journal article
Publisher
Routledge
Topic
- Business Administration
Status
Published
ISBN/ISSN/Other
- ISSN: 1466-4283