Forecasting Weekly Electricity Prices at Nord Pool

30 Pages Posted: 7 Jun 2007 Last revised: 6 Feb 2009

Date Written: September 2007

Abstract

This paper analyses the forecasting power of weekly futures prices at Nord Pool. The forecasting power of futures prices is compared to an ARIMAX model of the spot price. The time series model contains lagged external variables such as: temperature, precipitation, reservoir levels and the basis (futures price less the spot price); and generally reflects the typical seasonal patterns in weekly spot prices. Results show that the time series model forecasts significantly beat futures prices when using the Diebold and Mariano (1995) test. Furthermore, the average forecasting error of futures prices reveals that they are significantly above the settlement spot price at the 'delivery week' and their size increases as the time to maturity increases. Those agents taking positions in weekly futures contracts at Nord Pool might find the estimated ARIMAX model useful for improving their expectation formation process for the underlying spot price.

Keywords: electricity markets, power derivatives and forecasting electricity prices

JEL Classification: G13, L94

Suggested Citation

Torró, Hipòlit, Forecasting Weekly Electricity Prices at Nord Pool (September 2007). FEEM Working Paper No. 88/2007. Available at SSRN: https://ssrn.com/abstract=991532 or http://dx.doi.org/10.2139/ssrn.991532

Hipòlit Torró (Contact Author)

University of Valencia ( email )

Facultat d'Economia
Av. dels Tarongers s/n
Valencia, 46022
Spain
34-6-162 50 74 (Phone)
34-6-382 83 70 (Fax)

HOME PAGE: http://www.uv.es/torro

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