Abstract

http://ssrn.com/abstract=313481
 
 

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Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets


Hendrik Bessembinder


University of Utah - Department of Finance

Michael L. Lemmon


University of Utah - Department of Finance


Journal of Finance, Vol. 57, pp. 1347-1382, 2002

Abstract:     
Spot power prices are volatile and since electricity cannot be economically stored, familiar arbitrage-based methods are not applicable for pricing power derivative contracts. This paper presents an equilibrium model implying that the forward power price is a downward biased predictor of the future spot price if expected power demand is low and demand risk is moderate. However, the equilibrium forward premium increases when either expected demand or demand variance is high, because of positive skewness in the spot power price distribution. Preliminary empirical evidence indicates that the premium in forward power prices is greatest during the summer months.

Accepted Paper Series





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Date posted: November 29, 2003  

Suggested Citation

Bessembinder, Hendrik and Lemmon, Michael L., Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets. Journal of Finance, Vol. 57, pp. 1347-1382, 2002. Available at SSRN: http://ssrn.com/abstract=313481

Contact Information

Hendrik (Hank) Bessembinder (Contact Author)
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
Michael L. Lemmon
University of Utah - Department of Finance ( email )
David Eccles School of Business
Salt Lake City, UT 84112
United States
801-585-5210 (Phone)
801-581-7214 (Fax)
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