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The hedging performance of electricity futures on the Nordic power exchange

Byström, Hans LU (2003) In Applied Economics 35(1). p.1-11
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 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... (More)
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. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Applied Economics
volume
35
issue
1
pages
1 - 11
publisher
Routledge
external identifiers
  • wos:000180517400001
  • scopus:0037428277
ISSN
1466-4283
DOI
10.1080/00036840210138365
language
English
LU publication?
yes
id
a93331fa-c685-4d27-bfe2-263fb52788e7 (old id 891342)
alternative location
http://www.ingentaconnect.com/content/routledg/raef/2003/00000035/00000001/art00001
date added to LUP
2008-01-10 18:33:56
date last changed
2018-02-04 03:28:40
@article{a93331fa-c685-4d27-bfe2-263fb52788e7,
  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 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.},
  author       = {Byström, Hans},
  issn         = {1466-4283},
  language     = {eng},
  number       = {1},
  pages        = {1--11},
  publisher    = {Routledge},
  series       = {Applied Economics},
  title        = {The hedging performance of electricity futures on the Nordic power exchange},
  url          = {http://dx.doi.org/10.1080/00036840210138365},
  volume       = {35},
  year         = {2003},
}