Modeling the term structure dynamics in the Nordic Electricity swap market

This paper analyzes the distributions of daily logreturns of \u85nancial contracts traded at the Nordic electricity exchange, Nord Pool. These contracts are settled against the average spot price during a delivery period and may accordingly be termed electricity swaps. While fat tailed distributions of electricity spot prices have been investigated by Bottazzi et al. [9], Weron et al. [16], Weron and Misiorek [17], Cartea and Figureroa [11], and Barlow et al. [2], fat-tailed spot prices do not necessarily carry over to electricity swap logreturns, the market invariants essential for derivatives pricing and Value-at-Risk measurement. Due to the non-storability of electricity, Borovkova and Geman [8] claim that "..electricity spot and forward prices are not closely related". Vehviläinen [15] argues likewise that "no analytical connection has been established between the (electricity) spot and forward price. " These arguments are equally valid for properly weighted forward prices, swaps. Nevertheless, in an empirical analysis of Nordic electricity swap returns, Benth and Koekebakker [5