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Risk premia in the German electricity futures market

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  • Pietz, Matthäus
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    Abstract

    The mechanism behind price formation in electricity futures markets is still under discussion. Theory suggests that hedging pressure caused by deviating risk preferences is the most promising approach. This paper contributes to this discussion through an empirical investigation of electricity futures for delivery in Germany traded at the European Energy Exchange (EEX). We analyse the futures prices from an ex post perspective and show that there is evidence for significant positive risk premia at the short-end. Furthermore, we find that risk premia show a term structure. Evidence for the existence of seasonality in the risk premia is found as well. When testing for factors influencing the risk premia the results suggest that risk premia are directly related to factors linked to risk considerations. --

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    Bibliographic Info

    Paper provided by Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München in its series CEFS Working Paper Series with number 2009-07.

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    Date of creation: 2009
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    Handle: RePEc:zbw:cefswp:200907

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    Related research

    Keywords: Electricity; Electricity Market; Forward Market; Futures Market; Risk Premia; Risk Premium; Realised Risk Premia; Ex post Risk Premia;

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    References

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    1. 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.
    2. Roon, F.A. de & Nijman, T.E. & Veld, C.H., 2000. "Hedging pressure effects in futures markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-83944, Tilburg University.
    3. Weron, Rafal, 2008. "Market price of risk implied by Asian-style electricity options and futures," Energy Economics, Elsevier, vol. 30(3), pages 1098-1115, May.
    4. Hirshleifer, David, 1989. "Determinants of Hedging and Risk Premia in Commodity Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 313-331, September.
    5. Bierbrauer, Michael & Menn, Christian & Rachev, Svetlozar T. & Truck, Stefan, 2007. "Spot and derivative pricing in the EEX power market," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3462-3485, November.
    6. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
    7. Stoll, Hans R., 1979. "Commodity Futures and Spot Price Determination and Hedging in Capital Market Equilibrium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(04), pages 873-894, November.
    8. Redl, Christian & Haas, Reinhard & Huber, Claus & Böhm, Bernhard, 2009. "Price formation in electricity forward markets and the relevance of systematic forecast errors," Energy Economics, Elsevier, vol. 31(3), pages 356-364, May.
    9. Hendrik Bessembinder & Michael L. Lemmon, 2002. "Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets," Journal of Finance, American Finance Association, vol. 57(3), pages 1347-1382, 06.
    10. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
    11. Julia Popova & Stratford Douglas, 2006. "Storage and the Electricity Forward Premium," Working Papers 06-16 Classification-, Department of Economics, West Virginia University.
    12. Alvaro Cartea & Pablo Villaplana Conde, 2007. "Spot Price Modeling and the Valuation of Electricity Forward Contracts: the Role of Demand and Capacity," Birkbeck Working Papers in Economics and Finance 0718, Birkbeck, Department of Economics, Mathematics & Statistics.
    13. Daskalakis, George & Markellos, Raphael N., 2009. "Are electricity risk premia affected by emission allowance prices? Evidence from the EEX, Nord Pool and Powernext," Energy Policy, Elsevier, vol. 37(7), pages 2594-2604, July.
    14. 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.
    15. Hipòlit Torró & Julio Lucia, 2008. "Short-term electricity futures prices: Evidence on the time-varying risk premium," Working Papers. Serie EC 2008-08, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    16. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
    17. Kolos, Sergey P. & Ronn, Ehud I., 2008. "Estimating the commodity market price of risk for energy prices," Energy Economics, Elsevier, vol. 30(2), pages 621-641, March.
    18. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
    19. Marckhoff, Jan & Wimschulte, Jens, 2009. "Locational price spreads and the pricing of contracts for difference: Evidence from the Nordic market," Energy Economics, Elsevier, vol. 31(2), pages 257-268, March.
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    Citations

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    Cited by:
    1. Michal Michalovský & Igor Paholok, 2011. "Portfolio Theory and Electricity Forward Markets," European Financial and Accounting Journal, University of Economics, Prague, vol. 2011(1), pages 76-103.
    2. Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2014. "The impact of long-only index funds on price discovery and market performance in agricultural futures markets," IAMO Discussion Papers 147, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
    3. Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2013. "Der Einfluss von Long-only-Indexfonds auf die Preisfindung und das Marktergebnis an landwirtschaftlichen Warenterminmärkten," IAMO Discussion Papers 142, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
    4. Pietz, Matthäus, 2009. "Risk premia in electricity wholesale spot markets: empirical evidence from Germany," CEFS Working Paper Series 2009-11, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.

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