Model based economic analysis

Normetrics is an interface to research and consulting work based on econometric modelling, in particular to the development and use of the Norwegian Aggregate Model (NAM).

Unknown unknowns in the German-Nordic  electricity price difference

In September 2018, a huge default by an individual trader in the German-Nordic power market led to inquests and demands for fresh funds from market participants, as the Nasdaq exchange and
its customers had to rebuild their defences against defaults in the derivatives markets after they were badly damaged by soured bets from an individual trader.

The German-Nordic electricity price difference (future price) is a wide sense non-stationary series, with a unit-root and with intermittent location-shifts. Using appropriate econometric methods, those defining features of the series could have been asserted empirically before the large price difference occurred in September 2018. Hence it is the magnitude of the locations-shifts in the September that makes them different from earlier breaks, not their nature as «unknown unknowns» for any forecaster or investor who attempted to foresee the development of the price difference based on the information in the historical time series. The use of stationary models with ARCH is likely to lead to underestimation of market price volatility, both in the short term and medium term perspective, maybe allowing too large positions being taken by market operators.

Link to paper with analysis

Earlier posts:

3 March 2018, Norway drops its nominal anchor.   Link to Norwegian version

22/11/2017 Phillip’s Curve Myth

20/10/2017 Rapport 2/2017 fra Normetrics

4/10/2017  Rapport 1/2107 fra Normetrics

15/08/2017 NAM and Forecast Robustness

21/06/2017 Boligpris- og renteusikkerhet   Housing price and interest rate uncertainty

08/062017  Finanstilsynet benytter NAM i ny stresstest av norsk økonomi

03/06/2017: Lavere arbeidsledighet framover.   Norwegian unemployment on the ebb again

29/05/2017: Varslet oppsving i norsk økonomi?   Arrival of a well announced upturn?

 

Contact information:

post@normetrics.no;

Normetrics is edited by

Ragnar Nymoen (+ 47) 97 97 02 48,    ragnar.nymoen@normetrics.no

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