Assessing the influence of spot price predictability on electricity futures hedging
AbstractA common feature of energy prices is that spot price changes are partially predictable due to weather and demand seasonalities. This paper follows the Ederington and Salas (2008) framework and considers the expected change in spot prices when minimum variance hedge ratios are computed. The poor effectiveness of hedging strategies obtained in previous studies on electricity was because the standard hedging approach underestimates the effectiveness of hedging. In the empirical study made in this paper, weekly spot price risk is hedged with weekly futures in the Nord Pool electricity market. In this case, the optimal selection of the futures contract may produce risk reductions whose values vary between 60% and 80% – depending on the hedging duration (one to three weeks) and the analysed sub-period (in-sample and out-of-sample sub-periods).
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 18892.
Date of creation: 31 Mar 2009
Date of revision:
electricity markets; futures; hedging ratio; electricity price risk;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-12-05 (All new papers)
- NEP-ENE-2009-12-05 (Energy Economics)
- NEP-RMG-2009-12-05 (Risk Management)
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