The effect of Nordic system price uolatility on Liquidity in Nordic power deriuatiues

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.