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Bilateral Forward Contracts and Spot Prices

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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, , vol. 31(3), pages 67-82, July.
    • Handle: RePEc:sae:enejou:v:31:y:2010:i:3:p:67-82
    DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No3-4
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    References listed on IDEAS

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    1. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
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    Cited by:

    1. Geert Van Moer, 2024. "Secret Bilateral Forward Contracting," Journal of Industrial Economics, Wiley Blackwell, vol. 72(2), pages 807-847, June.

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