The Overnight Risk Premium in Electricity Forward Contracts

17 Pages Posted: 20 Dec 2014 Last revised: 2 Mar 2015

See all articles by Stein-Erik Fleten

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU)

Liv Hagen

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Maria Nygård

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Ragnhild Smith-Sivertsen

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Johan Sollie

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology

Date Written: December 16, 2014

Abstract

We analyze the risk premium on electricity forward contracts traded for the Nordic and German/Austrian electricity markets. We argue that finding risk premiums by analyzing overnight returns is more relevant than the frequently used ex post approach. The derivatives in these markets can be characterized as trading products and hedging products. Each contract shows a clear increase in trading volume and liquidity when approaching maturity. We link this to a testable hypothesis where financial traders are compensated for holding price risk, and where the sign and magnitude of the risk premium changes depending on the hedging pattern of producers and retailers. Incorporating this in regressions we find that there are higher risk premiums in the period before the forwards become front products, compared to the risk premiums in the front period. Quarterly and monthly contracts show the most significant results.

Keywords: risk premia, energy prices, liquidity, trading

JEL Classification: C20, C52, G13, G14

Suggested Citation

Fleten, Stein-Erik and Hagen, Liv and Nygård, Maria and Smith-Sivertsen, Ragnhild and Sollie, Johan, The Overnight Risk Premium in Electricity Forward Contracts (December 16, 2014). Energy Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2540468 or http://dx.doi.org/10.2139/ssrn.2540468

Stein-Erik Fleten

Norwegian University of Science and Technology (NTNU) ( email )

NO-7491 Trondheim
Norway

HOME PAGE: http://www.iot.ntnu.no/users/fleten

Liv Hagen

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Maria Nygård

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Ragnhild Smith-Sivertsen

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

Johan Sollie (Contact Author)

Norwegian University of Science and Technology (NTNU) - Department of Industrial Economics and Technology ( email )

NO-7491 Trondheim
Norway

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