Journal of Energy Markets

Risk.net

The Nordic futures market for power: finally mature and efficient?

Erik Smith-Meyer and Ole Gjølberg

  • Nordic short-term power futures were biased pre-2009
  • Nordic short term power futures have turned non-biased after 2009
  • Trading strategies based on the biasedness of futures prices have turned non-profitable post 2009
  • The Nordic power futures market have turned weak form efficient

ABSTRACT

A number of studies have found nearby futures prices in the Nordic power market to be biased forecasts, overshooting subsequent spot prices. This could be due to a persistent risk premium in a market dominated by long hedgers. However, in several studies the size of the bias has been taken as evidence of the market being immature and inefficient. In this paper, we present the results from an updated study of the forecasting performance of Nordic power futures. Using observations from October 2003 through January 2015, we estimate the standard models as well as a set of models in which we allow for seasonal variations and possible shifts in the risk premium, given structural changes in the market. Further, we report the results from simulated investments in which we persistently short nearby futures and maintain this position through expiration. We find that, after 2008, Nordic short-term power futures became unbiased and more precise forecasts. Consequently, we conclude that the Nordic futures market for power might have matured and now appears to be at least weak-form efficient. We suggest that the physical integration of the Nordic and Dutch markets through the opening of the NorNed cable in 2008 may have been a factor that contributed to this development.

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