The effect of Nordic system price volatility on liquidity in Nordic power derivatives
Master thesis
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Date
2023Metadata
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- Master of Science [1800]
Abstract
The Nordic power market is a key player in facilitating the production of green
energy. Especially in recent time, the market has seen a substantial increase in
power prices and volatility. A tool for hedging this exposure is the Nasdaq
Commodities exchange, which offers Nordic power derivatives. However, Nasdaq
themselves has claimed this market is relatively illiquid. Our thesis aims to investigate how volatility in Nordic power prices affects the
liquidity in the Nordic power derivative market, with special emphasis on the 2022
power crisis. Our analysis is based on daily orderbooks from different power
derivatives, as well as daily Nordic system prices from 2016 to 2023. We use OLS
regression in order to examine any possible relationship between volatility and
liquidity. We find volatility and liquidity to have a negative relationship. This is in line with
present literature, due to liquidity providers being less attracted to volatile markets,
although empirical testing has given different results. We found volatility in 2022
to bid-ask spread, but lack statistical significance to back up this result. In 2022, we
observed that market participants were more willing to add orders despite volatile
system prices compared to 2019.
Description
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2023