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We study time-zero efficiency of electricity derivatives markets. Bytime-zero efficiency is meant a sequence of prices of derivatives contractshaving the same underlying asset but different times to maturity which impliesthat prices comply with a set of efficiency conditions that prevent profitabletime-zero arbitrage opportunities. We investigate whether statistical tests,based on the law of one price, and trading rules, based on price differentialsand no-arbitrage violations, are useful for assessing time-zero efficiency. Weapply tests and trading rules to daily data of three European power markets:Germany, France and Spain. In the case of the German market, after consideringliquidity availability and transaction costs, results are not inconsistent withtime-zero efficiency. However, in the case of the French and Spanish markets,limitations in liquidity and representativeness are challenges that preventdefinite conclusions. Liquidity in French and Spanish markets should improve byusing pricing and marketing incentives. These incentives should attract moreparticipants into the electricity derivatives exchanges and should encouragethem to settle OTC trades in clearinghouses. Publication of statistics onprices, volumes and open interest per type of participant should be promoted.

Time-zero Efficiency of European Power Derivatives Markets