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Electricity derivatives: an application to the futures Italian market

Author

Listed:
  • Laura Casula

    (Università degli Studi di Cagliari)

  • Giovanni Masala

    (Università degli Studi di Cagliari)

Abstract

Since the liberalization of electricity markets, electricity prices are more volatile and expansion in electricity derivatives trading occurs. Indeed, a well-known feature of electricity prices concerns its high volatility. For this reason, operators use power futures to hedge against unexpected risk deriving from adverse fluctuations of spot prices within the planned delivering period. Indeed, futures contracts permit to fix the price of electricity in advance for the use in the scheduled period. Our paper is devoted specifically to the Italian electricity market. In this respect, we examine empirical data from IDEX, the Energy Derivatives part of the Italian derivatives market IDEM, administered by “Borsa Italiana.” We finally survey the possible connections concerning futures and spot prices and, as a consequence, we deduce information about important indicators whereof the ex-post risk premium and the net convenience yield. For this purpose, we use several regression techniques to determine suitable explanatory variables inherent the Italian market for the ex-post risk premium and the net convenience yield.

Suggested Citation

  • Laura Casula & Giovanni Masala, 2021. "Electricity derivatives: an application to the futures Italian market," Empirical Economics, Springer, vol. 61(2), pages 637-666, August.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:2:d:10.1007_s00181-020-01915-2
    DOI: 10.1007/s00181-020-01915-2
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    References listed on IDEAS

    as
    1. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 44(C), pages 178-190.
    2. Diko Pavel & Lawford Steve & Limpens Valerie, 2006. "Risk Premia in Electricity Forward Prices," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 10(3), pages 1-24, September.
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    Cited by:

    1. Janczura, Joanna & Wójcik, Edyta, 2022. "Dynamic short-term risk management strategies for the choice of electricity market based on probabilistic forecasts of profit and risk measures. The German and the Polish market case study," Energy Economics, Elsevier, vol. 110(C).

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    More about this item

    Keywords

    Electricity markets; Futures; Risk premium; Convenience yield; Linear regression; Partial least squares regression;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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