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Expectations and Forward Risk Premium in the Spanish Power Market

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  • María Dolores Furió

    (Universitat de València)

  • Vicente Meneu

    (Universitat de València)

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    Abstract

    To analyse the forward risk premium in the Spanish electricity market, we adopt not only an ex post approach, but also an ex ante. We find that the sign of the ex post forward premium depends on the unexpected variation in demand and on the unexpected variation in the hydro-energy capacity, and that the ex ante forward premium varies with the expected demand in tight market conditions, showing that the participation of forward dealing agents in the Spanish market responds to risk considerations. Moreover, we find support for the implications derived from the Bessembinder & Lemmon (2002) equilibrium model.

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2009-02.pdf
    File Function: Fisrt version / Primera version, 2009
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    Bibliographic Info

    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2009-02.

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    Length: 24 pages
    Date of creation: Jan 2009
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2009-02

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    1. 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.
    2. Catarina Goulão & Luca Panaccione, 2007. "Pooling And Redistribution With Moral Hazard," Working Papers. Serie AD 2007-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Francis A. Longstaff & Ashley W. Wang, 2004. "Electricity Forward Prices: A High-Frequency Empirical Analysis," Journal of Finance, American Finance Association, vol. 59(4), pages 1877-1900, 08.
    4. Benth, Fred Espen & Cartea, Álvaro & Kiesel, Rüdiger, 2008. "Pricing forward contracts in power markets by the certainty equivalence principle: Explaining the sign of the market risk premium," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2006-2021, October.
    5. Christophe Muller, 2007. "Axiomatically Sound Poverty Measurement With Scarce Data And Price Dispersion," Working Papers. Serie AD 2007-02, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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