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Assessing the influence of spot price predictability on electricity futures hedging

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  • Torro, Hipolit

Abstract

A 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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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18892.

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Date of creation: 31 Mar 2009
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Handle: RePEc:pra:mprapa:18892

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Keywords: electricity markets; futures; hedging ratio; electricity price risk;

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