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An Empirical Market Microstructure Analysis of the Implied Spread Cost in the Japanese Day-Ahead Electricity Market

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  • Shin S. Ikeda

    (National Graduate Institute for Policy Studies)

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    Abstract

    Historical data of system prices over 48 half-hour intra-daily intervals in the Japan Electric Power Exchange (JEPX) are analyzed. Given theoretical and graphical preliminary analysis, we extract measures of the spread between the efficient price and actual transaction price for each month from November 2006 to April 2012. The measures are based on the first-order serial covariance of transaction returns proposed by Roll (1984) and on the historical highs and lows with some bias correction proposed by Corwin and Schultz (2012). Viewed as measures of the marginal costs of trading in the JEPX, the estimated spreads are on average at least 50 times as large as the one in the well-functioning S&P500 index futures market. The traded amount of electricity does not explain the variation of spreads once the time-of-a-day fixed effects and month-specific time effect are explicitly accounted for in the panel regression.

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    Bibliographic Info

    Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 12-22.

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    Length: 26 pages
    Date of creation: Mar 2013
    Date of revision:
    Handle: RePEc:ngi:dpaper:12-22

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    1. Tinic, Seha M, 1972. "The Economics of Liquidity Services," The Quarterly Journal of Economics, MIT Press, vol. 86(1), pages 79-93, February.
    2. Ananth N. Madhavan, . "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers 16-90, Wharton School Rodney L. White Center for Financial Research.
    3. Crack, Timothy Falcon & Ledoit, Olivier, 1996. " Robust Structure without Predictability: The "Compass Rose" Pattern of the Stock Market," Journal of Finance, American Finance Association, vol. 51(2), pages 751-62, June.
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    5. Kanamura, Takashi & Ohashi, Kazuhiko, 2007. "A structural model for electricity prices with spikes: Measurement of spike risk and optimal policies for hydropower plant operation," Energy Economics, Elsevier, vol. 29(5), pages 1010-1032, September.
    6. Shane A. Corwin & Paul Schultz, 2012. "A Simple Way to Estimate Bidā€Ask Spreads from Daily High and Low Prices," Journal of Finance, American Finance Association, vol. 67(2), pages 719-760, 04.
    7. Fang, Yue, 2002. "The compass rose and random walk tests," Computational Statistics & Data Analysis, Elsevier, vol. 39(3), pages 299-310, May.
    8. Jegadeesh N. & Titman S., 1995. "Short-Horizon Return Reversals and the Bid-Ask Spread," Journal of Financial Intermediation, Elsevier, vol. 4(2), pages 116-132, April.
    9. Schultz, Paul, 2000. "Regulatory and Legal Pressures and the Costs of Nasdaq Trading," Review of Financial Studies, Society for Financial Studies, vol. 13(4), pages 917-57.
    10. Stoll, Hans R & Whaley, Robert E, 1990. "Stock Market Structure and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 37-71.
    11. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
    12. Haller, Andreas & Stoll, Hans R., 1989. "Market structure and transaction costs: Implied spreads in the German stock market," Journal of Banking & Finance, Elsevier, vol. 13(4-5), pages 697-708, September.
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