Liquidity Dynamics in the Nordic Financial Power Market : An Empirical Impact Analysis of the Liquidity at the NASDAQ OMX Commodities Exchange Following Nord Pool’s 2021 Mispricing of the Nordic System Price

Abstract

In this study, we explore liquidity dynamics in the Nordic financial power market in late fall 2021. We focus on the impact of a pricing error in the Nordic power derivatives’ reference: the Nordic system price. Our objective is to analyze market liquidity changes and their causes. Using a difference-in-differences approach, we compare liquidity changes between the Nordic and German markets, the latter serving as a control based on similar market dynamics. Our analysis centers on the bid-ask spread found in our reconstructed order books. Following the mispricing event, we observe an increased bid-ask spread in the Nordic market, signaling reduced liquidity. This could stem from decreased investor trust and heightened caution. We also examine liquidity through volume and depth tests but face data limitations.