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Information in Electricity Forward Prices

Author

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  • Michelfelder, Richard A.
  • Pilotte, Eugene A.

Abstract

We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

Suggested Citation

  • Michelfelder, Richard A. & Pilotte, Eugene A., 2020. "Information in Electricity Forward Prices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(8), pages 2641-2664, December.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:8:p:2641-2664_8
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    Cited by:

    1. Fouad El Gohary & Sofie Nyström & Lizette Reitsma & Cajsa Bartusch, 2021. "Identifying Challenges in Engaging Users to Increase Self-Consumption of Electricity in Microgrids," Energies, MDPI, vol. 14(5), pages 1-27, February.
    2. Cao, K.H. & Qi, H.S. & Tsai, C.H. & Woo, C.K. & Zarnikau, J., 2021. "Energy trading efficiency in the US Midcontinent electricity markets," Applied Energy, Elsevier, vol. 302(C).

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