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Electricity Forward Prices: A High‐Frequency Empirical Analysis
Author(s) -
Longstaff Francis A.,
Wang Ashley W.
Publication year - 2004
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2004.00682.x
Subject(s) - spot contract , electricity , volatility (finance) , forward contract , revenue , economics , electricity market , forward price , spot market , forward rate , econometrics , risk premium , financial economics , monetary economics , finance , interest rate , futures contract , engineering , electrical engineering
We conduct an empirical analysis of forward prices in the PJM electricity market using a high‐frequency data set of hourly spot and day‐ahead forward prices. We find that there are significant risk premia in electricity forward prices. These premia vary systematically throughout the day and are directly related to economic risk factors, such as the volatility of unexpected changes in demand, spot prices, and total revenues. These results support the hypothesis that electricity forward prices in the Pennsylvania, New Jersey, and Maryland market are determined rationally by risk‐averse economic agents.