An empirical analysis of futures pricing in the Nordic electricity market
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- Master Thesis 
The aim of this paper is to study the pricing of futures contracts relative to expected future spot prices in the Nordic electricity market. Data set of 1–6 weeks ahead weekly and 1–6 months ahead monthly futures is used to identify whether futures premium is present in the Nordic market. The findings reveal that short term futures contracts are unbiased predictors of the future spot prices. However, at longer maturities (5–6 weeks for weekly contracts and 2–6 months for monthly ones) significant time-varying futures premium exists. This premium is positive on average and doesn’t vary significantly by seasons. Furthermore, the magnitude of the premium is found to be substantially higher than in other commodity markets. Finally, a link between the futures premium and measures of risk (reservoir level, variance and skewness of the spot prices) is tested to find out whether the premium exists as a compensation for risk or mispricing in the market. The futures premium is found to be positively related to the reservoir level, while relationship with variance and skewness of the spot prices is mostly insignificant. As the magnitude of the premium is too high to be explained by this sole risk factor, it is concluded that mispricing exists in futures contracts with maturities longer than 4 weeks in the Nordic electricity market.