Short-Term Electricity Futures Prices: Evidence on the Time-Varying Risk Premium
35 Pages Posted: 14 Sep 2007 Last revised: 20 Feb 2008
Date Written: February 2008
Abstract
This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of year 2002, the variation of the risk premiums was related to the variance and the skewness of future spot prices. This result is consistent with the view that risk considerations played a role in the determination of futures prices. Finally, additional evidence provided throughout the paper supports the view that circumstances changed in the Nord Pool market after the shock period.
Keywords: risk premium, electricity futures, Nord Pool
JEL Classification: G13, L94
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Understanding Electricity Price Volatility within and Across Markets
By Mika Goto and George Andrew Karolyi
-
High Frequency Electricity Spot Price Dynamics: An Intra-Day Markets Approach
By Graeme Guthrie and Steen Videbeck
-
Risk and Reward at the Speed of Light: A New Electricity Price Model
By Samuel E. Bodily and Michel Del Buono
-
The Risk Premium and the Esscher Transform in Power Markets
By Fred Espen Benth and Carlo Sgarra
-
Modelling Spot Prices in Deregulated Wholesale Electricity Markets: A Selected Empirical Review
By Helen Higgs and Andrew C. Worthington
-
Modelling Higher Moments of Electricity Prices
By Gregorio Serna and Pablo Villaplana