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The hedging effectiveness of electricity futures in the Spanish market

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  • Peña, Juan Ignacio

Abstract

This paper studies the year-by-year and month-by-month (the same month in all years) hedging effectiveness of futures contracts in the Spanish electricity market from 2007 to 2022. We compare the in-sample and out-of-sample hedging ability of naïve, minimum variance, partially predictable, non-parametric, and BEKK_T hedge ratios. Hedging effectiveness varies over time and across months because of unstable correlations between spot price changes and futures price changes. Some methods present meaningful in-sample performance, but the out-of-sample hedging effectiveness is limited. The hedging effectiveness of the naïve ratio on a year-by-year (month-by-month) basis, with monthly differences, is 16% (40%).

Suggested Citation

  • Peña, Juan Ignacio, 2023. "The hedging effectiveness of electricity futures in the Spanish market," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322006833
    DOI: 10.1016/j.frl.2022.103507
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    More about this item

    Keywords

    Electricity markets; Optimal hedge ratio; Futures contracts; Hedge effectiveness;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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