Efficiently estimated mean and volatility characteristics for the nordic spot electric power market

This paper investigates the conditional mean and volatility characteristics of the Nordic spot electric power market. The investigation is motivated by the fact that the system price is the underlying instrument for several derivatives in the electric power market, the variance-covariance matrix may be applied for value at risk calculations and consumption patterns may suggest extensive predictability in mean and volatility. An adjustment procedure shows that the raw data series show strong day, month and scaling effects. The applied BIC efficient ARMA-GARCH-in-Mean specifications for the adjusted time show close to zero drift and an autocorrelation pattern for the conditional mean, suggesting consumption patterns. As expected, the in-Mean parameter is redundant and clearly significant ARCH and GARCH effects in the conditional volatility process. All specification tests reject data dependence in the residuals. Our results therefore suggest that a BIC efficient ARMA-GARCH lag specification seems to model the market dynamics adequately.