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Electricity Forward Prices: A High-Frequency Empirical Analysis

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  • Longstaff, Francis
  • Wang, Ashley
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    Abstract

    We conduct an empirical analysis of electricity forward prices using a high-frequency data set of hourly spot and day-ahead forward prices. We find that there are significant risk premia in electricity forward prices. These premia vary systematically throughout the day and are directly related to economic risk factors such as the volatility of unexpected changes in prices and demand as well as the risk of price spikes. In contrast to the popular post-Enron view that electricity markets are easily manipulated, these results support the hypothesis that electricity forward prices are determined rationally by risk-averse economic agents.

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    Bibliographic Info

    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt7mh2m2bt.

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    Date of creation: 01 Jul 2002
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    Handle: RePEc:cdl:anderf:qt7mh2m2bt

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    1. Hazuka, Thomas B, 1984. " Consumption Betas and Backwardation in Commodity Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 39(3), pages 647-55, July.
    2. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 57(3), pages 1347-1382, 06.
    3. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
    4. Bryan Routledge & Duane Seppi & Chester Spatt, . "Equilibrium Forward Curves for Commodities," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1997-50, Carnegie Mellon University, Tepper School of Business.
    5. French, Kenneth R, 1986. "Detecting Spot Price Forecasts in Futures Prices," The Journal of Business, University of Chicago Press, vol. 59(2), pages S39-54, April.
    6. Breeden, Douglas T., 1984. "Futures markets and commodity options: Hedging and optimality in incomplete markets," Journal of Economic Theory, Elsevier, vol. 32(2), pages 275-300, April.
    7. Hemler, Michael L. & Longstaff, Francis A., 1991. "General Equilibrium Stock Index Futures Prices: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 287-308, September.
    8. Hirshleifer, David & Subrahmanyam, Avanidhar, 1993. "Futures versus Share Contracting as Means of Diversifying Output Risk," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 103(418), pages 620-38, May.
    9. Alvaro Escribano & Juan Ignacio Peña & Pablo Villaplana, 2002. "Modeling Electricity Prices: International Evidence," Economics Working Papers we022708, Universidad Carlos III, Departamento de Economía.
    10. Hirshleifer, David, 1990. "Hedging Pressure and Futures Price Movements in a General Equilibrium Model," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 411-28, March.
    11. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
    12. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, American Finance Association, vol. 45(3), pages 959-76, July.
    13. Jagannathan, Ravi, 1985. " An Investigation of Commodity Futures Prices Using the Consumption-based Intertemporal Capital Asset Pricing Model," Journal of Finance, American Finance Association, American Finance Association, vol. 40(1), pages 175-91, March.
    14. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 233.
    15. Chester Spatt & Bryan Routledge & Duane Seppi, 1998. "The Spark Spread: An equilibrium model of the Cross-Commodity Price Relationships in Electricity," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 1999-15, Carnegie Mellon University, Tepper School of Business.
    16. Richard, Scott F. & Sundaresan, M., 1981. "A continuous time equilibrium model of forward prices and futures prices in a multigood economy," Journal of Financial Economics, Elsevier, Elsevier, vol. 9(4), pages 347-371, December.
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    Cited by:
    1. Nomikos, Nikos K. & Soldatos, Orestes A., 2010. "Modelling short and long-term risks in power markets: Empirical evidence from Nord Pool," Energy Policy, Elsevier, vol. 38(10), pages 5671-5683, October.
    2. Redl, Christian & Haas, Reinhard & Huber, Claus & Böhm, Bernhard, 2009. "Price formation in electricity forward markets and the relevance of systematic forecast errors," Energy Economics, Elsevier, Elsevier, vol. 31(3), pages 356-364, May.
    3. Sandro Sapio, 2006. "An Empirically Based Model of the Supply Schedule in Day-Ahead Electricity Markets," LEM Papers Series 2006/12, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. Modjtahedi, Bagher & Movassagh, Nahid, 2005. "Natural-gas futures: Bias, predictive performance, and the theory of storage," Energy Economics, Elsevier, Elsevier, vol. 27(4), pages 617-637, July.
    5. Nomikos, Nikos K. & Soldatos, Orestes A., 2010. "Analysis of model implied volatility for jump diffusion models: Empirical evidence from the Nordpool market," Energy Economics, Elsevier, Elsevier, vol. 32(2), pages 302-312, March.
    6. Pablo Villaplana, 2003. "Pricing Power Derivatives: A Two-Factor Jump-Diffusion Approach," Business Economics Working Papers, Universidad Carlos III, Departamento de Economía de la Empresa wb031805, Universidad Carlos III, Departamento de Economía de la Empresa.
    7. Arciniegas, Ismael & Barrett, Chris & Marathe, Achla, 2003. "Assessing the efficiency of US electricity markets," Utilities Policy, Elsevier, Elsevier, vol. 11(2), pages 75-86, June.

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