TY - JOUR
T1 - Information in electricity forward prices
AU - Michelfelder, Richard A.
AU - Pilotte, Eugene A.
N1 - Publisher Copyright:
© 2020 Cambridge University Press. All rights reserved.
Copyright:
Copyright 2020 Elsevier B.V., All rights reserved.
PY - 2020/12/1
Y1 - 2020/12/1
N2 - 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.
AB - 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.
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U2 - 10.1017/S0022109019000930
DO - 10.1017/S0022109019000930
M3 - Review article
AN - SCOPUS:85085374865
SN - 0022-1090
VL - 55
SP - 2641
EP - 2664
JO - Journal of Financial and Quantitative Analysis
JF - Journal of Financial and Quantitative Analysis
IS - 8
ER -