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Bilateral Forward Contracts and Spot Prices

Author

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  • Nodir Adilov

Abstract

Allaz and Vila (1993) have shown that forward markets could mitigate market power and improve efficiency. This paper shows that efficiency-improving effect of forward markets is sensitive to the assumption that market participants behave like rational expectations agents when forecasting prices. The existence of forward contracts could increase spot prices and hurt efficiency if buyers engage in bilateral forward contracts and forward rates are influenced by historic prices. These findings have important policy implications for the electricity industry.

Suggested Citation

  • Nodir Adilov, 2010. "Bilateral Forward Contracts and Spot Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 67-82.
  • Handle: RePEc:aen:journl:2010v31-03-a04
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    References listed on IDEAS

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    1. De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    2. Lutz Kilian & Bruce Hicks, 2013. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003–2008?," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(5), pages 385-394, August.
    3. repec:hrv:faseco:33077905 is not listed on IDEAS
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    Cited by:

    1. Paulo Cesar Coutinho & Andre Rossi de Oliveira, 2013. "Trading Forward in the Brazilian Electricity Market," International Journal of Energy Economics and Policy, Econjournals, vol. 3(3), pages 272-287.
    2. Wolf-Peter Schill & Claudia Kemfert, 2011. "Modeling Strategic Electricity Storage: The Case of Pumped Hydro Storage in Germany," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 59-88.

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    JEL classification:

    • F0 - International Economics - - General

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