Testing the martingale difference hypothesis for the Nordic power derivatives market

Steinar Veka

Abstract

ABSTRACT

In this study, the price process for the four-week block futures contracts (traded between 1995 and 2003) and monthly forward contracts (trading since 2003) for Nordic electricity is tested for linear and nonlinear dependence. A time series consisting of the returns of the contracts closest to delivery is examined using a rolling window of 100 trading days. The result shows little evidence of nonlinear dependence, while evidence of linear dependence appears to coincide with instances of stressful market conditions. We also discuss whether indications of dependence in the returns series may be related to measures of volatility and trading volume. Overall, the Nordic electricity market seems to have been weak-form efficient through most of its lifespan.