Essays on the Financial Aspects of Power Prices at the Nord Pool Power Exchange

Sammanfattning: Essay I examines the market efficiency issues at the Nord Pool power exchange in the September 1995 - July 2002 period. A unique characteristic of this electricity exchange is the high hydropower proportion in the traded electricity; water in the hydro reservoir acting as a hydropower inventory therefore plays an important role in the pricing of electricity. Inventory holding and the seasonality of both demand and supply of hydropower generate inter-year and intra-year autocorrelation in power prices. I present theoretical discussion on why power price persistence invalidates the applicability of market efficiency concept based on the random walk theory. To lend support for the theoretical argument, I conduct empirical investigation that consists of various unit roots and cointegration methods to tackle the data problems/properties, and results show that weekly spot and futures prices are cointegrated. Philips-Loretan's nonlinear least square is applied in testing restriction of coefficient according to market efficiency hypothesis. Wald statistic shows that cointegration vector being (1, -1) is not binding. Residual testing using Ljung-Box Q-statistic confirms serial correlation. These findings are consistent with the theoretical prediction. Essay II investigates convenience yield behavior at the Nord Pool power exchange given the considerable storable hydropower being traded. Several hypotheses are tested concerning the behavior and determinants of convenience yield from holding hydropower inventory. The results reveal that convenience yield has a negative relationship with hydro reservoir content as inventory; convenience yield behavior can be statistically explained within a standard financial call option framework and the call option component can explain a large portion of variability in convenience yield; convenience yield varies on both yearly and monthly basis; there is an asymmetry of volatility of convenience yield during high/low hydro inventory periods.