Equilibrium Pricing and Optimal Hedging in Electricity Forward Markets

Posted: 29 Nov 2003  

Hendrik Bessembinder

Arizona State University

Michael L. Lemmon

University of Utah - Department of Finance

Multiple version iconThere are 2 versions of this paper

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.

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: https://ssrn.com/abstract=313481

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
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)

Paper statistics

Abstract Views
871