Supply, Demand, and Risk Premiums in Electricity Markets

64 Pages Posted: 11 Nov 2017

See all articles by Kris Jacobs

Kris Jacobs

University of Houston - C.T. Bauer College of Business

Yu Li

University of Houston, C.T. Bauer College of Business

Craig Pirrong

University of Houston - Department of Finance

Date Written: November 8, 2017

Abstract

We model the impact of supply and demand on risk premiums in electricity futures, using daily data for 2003-2014. The model provides a satisfactory fit and allows for unspanned economic risk not embedded in the futures price. The spot risk premium and forward bias implied by the model are on average large and negative but highly time-varying. Risk premiums display strong seasonal patterns, are related to the variance and skewness of the electricity spot price, and help predict future returns. The risk premium associated with supply constitutes the largest component of the total risk premium embedded in electricity futures.

Keywords: Electricity Futures; Economic Determinants; Supply; Demand; Risk Premium; Unspanned Risk

JEL Classification: G12, G13, Q02

Suggested Citation

Jacobs, Kris and Li, Yu and Pirrong, Craig, Supply, Demand, and Risk Premiums in Electricity Markets (November 8, 2017). Available at SSRN: https://ssrn.com/abstract=3066456 or http://dx.doi.org/10.2139/ssrn.3066456

Kris Jacobs

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States

Yu Li

University of Houston, C.T. Bauer College of Business ( email )

Houston, TX
United States

Craig Pirrong (Contact Author)

University of Houston - Department of Finance ( email )

Houston, TX 77204
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
63
Abstract Views
459
rank
360,935
PlumX Metrics