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Riding the Nordic German Power-Spread: The Einar Aas Experiment

Author

Listed:
  • Christian-Oliver Ewald
  • Erik Haugom
  • Gudbrand Lien
  • Pengcheng Song
  • StÃ¥le Størdal

Abstract

Inspired by the initial success and eventual failure of Einar Aas’ trading strategy exploiting dynamical patterns in the spread between Nordic and German electricity futures, we investigate the question whether there is evidence for possible arbitrage from engaging in both markets simultaneously and the possibility of constructing a trading strategy that ultimately beats the markets. To do this, we first assess the risk premium and relevant Sharpe values for the two markets and observe significant differences. This is followed by a discussion as to how far the different risk premia and Sharpe values alone are evidence of arbitrage. The answer is, they are not. However, we then show that an intelligently chosen long-short strategy constructed in the Einar Aas spirit can generate a positive alpha in the CAPM sense, hence providing evidence of arbitrage.

Suggested Citation

  • Christian-Oliver Ewald & Erik Haugom & Gudbrand Lien & Pengcheng Song & StÃ¥le Størdal, 2022. "Riding the Nordic German Power-Spread: The Einar Aas Experiment," The Energy Journal, , vol. 43(5), pages 51-70, September.
    • Handle: RePEc:sae:enejou:v:43:y:2022:i:5:p:51-70
    DOI: 10.5547/01956574.43.5.cewa
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    References listed on IDEAS

    as
    1. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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