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Information in Electricity Forward Prices

Published online by Cambridge University Press:  29 October 2019

Richard A. Michelfelder and
Eugene A. PilotteOpen the ORCID record for Eugene A. Pilotte[Opens in a new window]
Richard A. Michelfelder
Affiliation:
Michelfelder, richmich@camden.rutgers.edu
Eugene A. Pilotte*
Affiliation:
Pilotte, pilotte@camden.rutgers.edu, Rutgers University School of Business
*
Pilotte (corresponding author), pilotte@camden.rutgers.edu
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Abstract

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We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 8 , December 2020, pp. 2641 - 2664
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2019

Footnotes

We are especially grateful to Hendrik Bessembinder (the editor) and an anonymous referee for helpful comments and guidance. We also thank Athul Mohan for excellent research assistance and seminar participants at the Jan. 2018 Rutgers Center for Research in Regulated Industries Advanced Workshop in Regulation and Competition and the 2019 Rutgers Center for Research in Regulated Industries Eastern Conference for helpful suggestions and comments.

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