Hostname: page-component-586b7cd67f-t7czq Total loading time: 0 Render date: 2024-11-26T07:49:28.190Z Has data issue: false hasContentIssue false
  • English
  • Français

Information in Electricity Forward Prices

Published online by Cambridge University Press:  29 October 2019

Richard A. Michelfelder  and
Eugene A. Pilotte Open the ORCID record for Eugene A. Pilotte [Opens in a new window]
Richard A. Michelfelder
Affiliation:
Michelfelder, [email protected]
Eugene A. Pilotte*
Affiliation:
Pilotte, [email protected], Rutgers University School of Business
*
Pilotte (corresponding author), [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 8 , December 2020 , pp. 2641 - 2664
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are especially grateful to Hendrik Bessembinder (the editor) and an anonymous referee for helpful comments and guidance. We also thank Athul Mohan for excellent research assistance and seminar participants at the Jan. 2018 Rutgers Center for Research in Regulated Industries Advanced Workshop in Regulation and Competition and the 2019 Rutgers Center for Research in Regulated Industries Eastern Conference for helpful suggestions and comments.

References

Acharya, V. V.; Lochstoer, L. A.; and Ramadorai, T.. “Limits to Arbitrage and Hedging: Evidence from Commodity Markets.” Journal of Financial Economics, 109 (2013), 441–465.CrossRefGoogle Scholar
Benth, F. E.; Kallsen, J.; and Meyer-Brandis, T.. “A Non-Gaussian Ornstein–Uhlenbeck Process for Electricity Spot Price Modeling and Derivatives Pricing.” Applied Mathematical Finance, 14 (2007), 153–169.CrossRefGoogle Scholar
Bessembinder, H.“Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets.” Review of Financial Studies, 5 (1992), 637–667.CrossRefGoogle Scholar
Bessembinder, H., and Lemmon, M. L.. “Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets.” Journal of Finance, 57 (2002), 1347–1382.CrossRefGoogle Scholar
Bhardwaj, G.; Gorton, G. B.; and Rouwenhorst, K. G.. “Investor Interest and the Returns to Commodity Investing.” Journal of Portfolio Management, 42 (2016), 44–55.CrossRefGoogle Scholar
Bierbrauer, M.; Menn, C.; Rachev, S. T.; and Trück, S.. “Spot and Derivative Pricing in the EEX Power Market.” Journal of Banking & Finance, 31 (2007), 3462–3485.CrossRefGoogle Scholar
Borovkova, S.; Permana, F. J.; and Pavlyukevich, I.. “Modeling Electricity Prices by Potential Lévy Diffusions.” Journal of Energy Markets, 2 (2009), 83–110.CrossRefGoogle Scholar
Cartea, Á., and Figueroa, M. G.. “Pricing in Electricity Markets: A Mean Reverting Jump Diffusion Model with Seasonality.” Applied Mathematical Finance, 12 (2005), 313–335.CrossRefGoogle Scholar
Cartea, Á., and Villaplana, P.. “Spot Price Modeling and the Valuation of Electricity Forward Contracts: The Role of Demand and Capacity.” Journal of Banking & Finance, 32 (2008), 2502–2519.CrossRefGoogle Scholar
Carter, C. A.; Rausser, G. C.; and Schmitz, A.. “Efficient Asset Portfolios and the Theory of Normal Backwardation.” Journal of Political Economy, 91 (1983), 319–331.CrossRefGoogle Scholar
Chang, E. C.“Returns to Speculators and the Theory of Normal Backwardation.” Journal of Finance, 40 (1985), 193–208.CrossRefGoogle Scholar
Cochrane, D., and Orcutt, G. H.. “Application of Least Squares Regression to Relationships Containing Auto-Correlated Error Terms.” Journal of the American Statistical Association, 44 (1949), 32–61.Google Scholar
Cootner, P. H.“Returns to Speculators: Telser versus Keynes.” Journal of Political Economy, 68 (1960), 396–404.CrossRefGoogle Scholar
De Jong, C.“The Nature of Power Spikes: A Regime-Switch Approach.” Studies in Nonlinear Dynamics & Econometrics, 10 (2006), 1–26.Google Scholar
De Roon, F. A.; Nijman, T. E.; and Veld, C.. “Hedging Pressure Effects in Futures Markets.” Journal of Finance, 55 (2000), 1437–1456.CrossRefGoogle Scholar
De Vos, K.“Negative Wholesale Electricity Prices in the German, French and Belgian Day-Ahead, Intra-Day and Real-Time Markets.” The Electricity Journal, 28 (2015), 36–50.CrossRefGoogle Scholar
Diko, P.; Lawford, S.; and Limpens, V.. “Risk Premia in Electricity Forward Prices.” Studies in Nonlinear Dynamics & Econometrics, 10 (2006), 1–22.Google Scholar
Douglas, S., and Popova, J.. “Storage and the Electricity Forward Premium.” Energy Economics, 30 (2008), 1712–1727.CrossRefGoogle Scholar
Fama, E. F.“Forward and Spot Exchange Rates.” Journal of Monetary Economics, 14 (1984a), 319–338.CrossRefGoogle Scholar
Fama, E. F.“The Information in the Term Structure.” Journal of Financial Economics, 13 (1984b), 509–528.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage.” Journal of Business, 60 (1987), 55–73.CrossRefGoogle Scholar
Fanone, E.; Gamba, A.; and Prokopczuk, M.. “The Case of Negative Day-Ahead Electricity Prices.” Energy Economics, 35 (2013), 22–34.CrossRefGoogle Scholar
Geman, H., and Roncoroni, A.. “Understanding the Fine Structure of Electricity Prices.” Journal of Business, 79 (2006), 1225–1261.CrossRefGoogle Scholar
Gorton, G. B.; Hayashi, F.; and Rouwenhorst, K. G.. “The Fundamentals of Commodity Futures Returns.” Review of Finance, 17 (2012), 35–105.CrossRefGoogle Scholar
Gorton, G. B., and Rouwenhorst, K. G.. “Facts and Fantasies about Commodity Futures.” Financial Analysts Journal, 62 (2006), 47–68.CrossRefGoogle Scholar
Hagfors, L. I.; Paraschiv, F.; Molnar, P.; and Westgaard, S.. “Using Quantile Regression to Analyze the Effect of Renewables on EEX Price Formation.” Renewable Energy and Environmental Sustainability, 1 (2016), Article 32.CrossRefGoogle Scholar
Haugom, E., and Ullrich, C. J.. “Market Efficiency and Risk Premia in Short-Term Forward Prices.” Energy Economics, 34 (2012), 1931–1941.CrossRefGoogle Scholar
Huisman, R., and Kilic, M.. “Electricity Futures Prices: Indirect Storability, Expectations, and Risk Premiums.” Energy Economics, 34 (2012), 892–898.CrossRefGoogle Scholar
Huisman, R., and Mahieu, R.. “Regime Jumps in Electricity Prices.” Energy Economics, 25 (2003), 425–434.CrossRefGoogle Scholar
Keynes, J. A Treatise on Money. London, UK: Macmillan (1930).Google Scholar
Klüppelberg, C.; Meyer-Brandis, T.; and Schmidt, A.. “Electricity Spot Price Modelling with a View Towards Extreme Spike Risk.” Quantitative Finance, 10 (2010), 963–974.CrossRefGoogle Scholar
Knittel, C. R., and Roberts, M. R.. “An Empirical Examination of Restructured Electricity Prices.” Energy Economics, 27 (2005), 791–817.CrossRefGoogle Scholar
Koenker, R., and Bassett, G.. “Regression Quantiles.” Econometrica, 46 (1978), 33–50.CrossRefGoogle Scholar
Koijen, R. S. J.; Moskowitz, T. J.; Pedersen, L. H.; and Vrugt, E. B.. “Carry.” Journal of Financial Economics, 127 (2018), 197–225.CrossRefGoogle Scholar
Kolos, S. P., and Ronn, E. I.. “Estimating the Commodity Market Price of Risk for Energy Prices.” Energy Economics, 30 (2008), 621–641.CrossRefGoogle Scholar
Krapels, E. N., and Flemming, P.. “Impacts of the PJM RTO Expansion.” (2005), https://www.ferc.gov/CalendarFiles/20051120152202-Impact of PJM Expansion 11-01-05.pdf.Google Scholar
Lindström, E., and Regland, F.. “Modeling Extreme Dependence between European Electricity Markets.” Energy Economics, 34 (2012), 899–904.CrossRefGoogle Scholar
Longstaff, F. A., and Wang, A. W.. “Electricity Forward Prices: A High-Frequency Empirical Analysis.” Journal of Finance, 59 (2004), 1877–1900.CrossRefGoogle Scholar
Lucia, J. J., and Torró, H.. “On the Risk Premium in Nordic Electricity Futures Prices.” International Review of Economics & Finance, 20 (2011), 750–763.CrossRefGoogle Scholar
Meyer-Brandis, T., and Tankov, P.. “Multi-Factor Jump-Diffusion Models of Electricity Prices.” International Journal of Theoretical and Applied Finance, 11 (2008), 503–528.CrossRefGoogle Scholar
Paraschiv, F.; Erni, D.; and Pietsch, R.. “The Impact of Renewable Energies on EEX Day-Ahead Electricity Prices.” Energy Policy, 73 (2014), 196–210.CrossRefGoogle Scholar
Pirrong, C., and Jermakyan, M.. “The Price of Power: The Valuation of Power and Weather Derivatives.” Journal of Banking & Finance, 32 (2008), 2520–2529.CrossRefGoogle Scholar
Seifert, J., and Uhrig-Homburg, M.. “Modelling Jumps in Electricity Prices: Theory and Empirical Evidence.” Review of Derivatives Research, 10 (2007), 59–85.CrossRefGoogle Scholar
Valitov, N.“Risk Premia in the German Day-Ahead Electricity Market Revisited: The Impact of Negative Prices.” Energy Economics, 82 (2019), 70–77.CrossRefGoogle Scholar
Viehmann, J.“Risk Premiums in the German Day-Ahead Electricity Market.” Energy Policy, 39 (2011), 386–394.CrossRefGoogle Scholar
Weron, R.“Heavy-Tails and Regime-Switching in Electricity Prices.” Mathematical Methods of Operations Research, 69 (2009), 457–473.CrossRefGoogle Scholar
Working, H.“The Theory of Price of Storage.” American Economic Review, 39 (1949), 1254–1262.Google Scholar
Xiao, Y.; Colwell, D. B.; and Bhar, R.. “Risk Premium in Electricity Prices: Evidence from the PJM Market.” Journal of Futures Markets, 35 (2015), 776–793.CrossRefGoogle Scholar
Yohai, V. J.“High Breakdown-Point and High Efficiency Robust Estimates for Regression.” Annals of Statistics, 15 (1987), 642–656.CrossRefGoogle Scholar
Zellner, A.“An Efficient Method of Estimating Seemingly Unrelated Regressions and Tests for Aggregation Bias.” Journal of the American Statistical Association, 57 (1962), 348–368.CrossRefGoogle Scholar