Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity

101 Pages Posted: 29 Apr 2020

See all articles by Akshaya Jha

Akshaya Jha

Carnegie Mellon University

Frank Wolak

National Bureau of Economic Research (NBER)

Date Written: April 4, 2020

Abstract

Forward commodity markets allow more efficient risk-sharing and information aggregation, but there is little evidence that this reduces the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in commodity markets with transaction costs and use it to show that day-ahead prices better reflect real-time prices at all locations in California's wholesale electricity market after the introduction of financial trading on February 1st 2011. This results in a 2.7% reduction in market-wide production costs per megawatt-hour of electricity output in high demand days relative to low demand days after 2/1/2011.

Keywords: Wholesale Electricity Markets, Explicit Virtual Bidding, Financial Trading, Forward Commodity Markets, Information Aggregation, Transaction Costs

JEL Classification: G1, L94, Q48

Suggested Citation

Jha, Akshaya and Wolak, Frank A., Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity (April 4, 2020). Available at SSRN: https://ssrn.com/abstract=3568372 or http://dx.doi.org/10.2139/ssrn.3568372

Akshaya Jha (Contact Author)

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

Frank A. Wolak

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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