Portfolio Theory and Electricity Forward Markets
AbstractIn the discussion on the relationship between spot and forward prices in electricity markets, the equilibrium approach has an unambiguous prevalence. It is the relative recency of this market that gives rise to the question of how precisely forward prices converge to the spot prices. We decide to measure this convergence, with its eventual imbalance called risk premium, on several European energy exchanges trading electricity futures. The concept of risk premium, as it is worked out by Bessembinder and Lemon (2002) is reviewed in our essay through the Markowitz portfolio theory. Unlike in the B-L model, where the variance of the spot price has a strictly negative relationship to the risk premium, it is shown that the portfolio theory gives us a different inference that the variance can have both negative and positive impacts according to the strength of supply and demand in the market. This empirically tested and found appropriate. Positive dependence of variance in the electricity markets have been found in Central Europe and Scandinavia, while in Iberian the results are still negative.
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Bibliographic InfoArticle provided by University of Economics, Prague in its journal European Financial and Accounting Journal.
Volume (Year): 2011 (2011)
Issue (Month): 1 ()
Postal: European Financial and Accounting Journal, University of Economics, Prague, nám. W. Churchilla 4, 130 67 Prague 3, Czech Republic
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
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Birkbeck Working Papers in Economics and Finance, Birkbeck, Department of Economics, Mathematics & Statistics
0718, Birkbeck, Department of Economics, Mathematics & Statistics.
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