Forward curve dynamics in the Nordic electricity market

Abstract

The forward curve dynamics in the Nordic electricity market is examined. Six years of price data on futures and forward contracts traded in the Nordic electricity market are analysed. For the forward price function of electricity, we specify a multi‐factor term structure models in a Heath‐Jarrow‐Morton framework. Principal component analysis is used to reveal the volatility structure in the market. A two‐factor model explains 75 per cent of the price variation in our data, compared to approximately 95 per cent in most other markets. Further investigations show that correlation between short‐ and long‐term forward prices is lower than in other markets. We briefly discuss possible reasons why these special properties occur, and some consequences for hedging exposures in this market.

Citation

Koekebakker, S. and Ollmar, F. (2005), "Forward curve dynamics in the Nordic electricity market", Managerial Finance, Vol. 31 No. 6, pp. 73-94. https://doi.org/10.1108/03074350510769703