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Electricity futures prices: time varying sensitivity to fundamentals

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Author Info

  • Stein-Erik Fleten

    ()
    (Norwegian University of Science and Technology)

  • Ronald Huisman

    ()
    (Erasmus School of Economics and IEB)

  • Mehtap Kilic

    ()
    (Erasmus School of Economics)

  • Enrico Pennings

    ()
    (Erasmus School of Economics)

  • Sjur Westgaard

    ()
    (Norwegian University of Science and Technology)

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    Abstract

    This paper provides insight in the time-varying relation between electricity futures prices and fundamentals in the form of prices of contracts for fossil fuels. As supply curves are not constant and different producers have different marginal costs of production, we argue that the relation between electricity futures prices and futures prices of underlying fundamentals such as natural gas, coal and emission rights are not constant and vary over time. We test this view by applying a model that linearly relates electricity futures prices to the marginal costs of production and calculate the log-likelihood of different time-varying and constant specifications of the coefficients. To do so, we formulate the model in state-space form and apply the Kalman Filter to observe the dynamics of the coefficients. We analyse historical prices of futures contracts with different delivery periods (calendar year and seasons, peak and off-peak) from Germany and the U.K. The results indicate that analysts should choose a time-varying specification to relate the futures price of power to prices of underlying fundamentals.

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    Bibliographic Info

    Paper provided by Institut d'Economia de Barcelona (IEB) in its series Working Papers with number 2014/21.

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    Length: 29 pages
    Date of creation: 2014
    Date of revision:
    Handle: RePEc:ieb:wpaper:2013/6/doc2014-21

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    Related research

    Keywords: Electricity futures prices; prices of fossil fuels; time-varying coefficients; statespace model;

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