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
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hipòlit Torró & Julio Lucia, 2008. "Short-term electricity futures prices: Evidence on the time-varying risk premium," Working Papers. Serie EC 2008-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Cartea, Álvaro & Villaplana, Pablo, 2008.
"Spot price modeling and the valuation of electricity forward contracts: The role of demand and capacity,"
Journal of Banking & Finance,
Elsevier, vol. 32(12), pages 2502-2519, December.
- Alvaro Cartea & Pablo Villaplana Conde, 2007. "Spot Price Modeling and the Valuation of Electricity Forward Contracts: the Role of Demand and Capacity," Birkbeck Working Papers in Economics and Finance 0718, Birkbeck, Department of Economics, Mathematics & Statistics.
- Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, 06.
- Pietz, Matthäus, 2009. "Risk premia in the German electricity futures market," CEFS Working Paper Series 2009-07, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
- Nicolosi, Marco, 2010. "Wind power integration and power system flexibility-An empirical analysis of extreme events in Germany under the new negative price regime," Energy Policy, Elsevier, vol. 38(11), pages 7257-7268, November.
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