Locational Price Spreads and the Pricing of Contracts for Difference: Evidence from the Nordic Market

  • In electricity markets, not only does the risk of substantial price variations over time exist, but so does the risk of price variations over space, as prices between locations can differ due to transmission congestion. To manage this risk, Contracts for Difference (CfDs), i.e., forwards on the spread between a particular area price and the (unconstrained) system price, were introduced at the Scandinavian electricity exchange Nord Pool at the end of 2000. We empirically investigate the pricing of these CfDs over the period 2001 through 2006 and find that CfD prices contain significant risk premia. Their sign and magnitude, however, differ substantially between areas and delivery periods, because areas are subject to transmission congestion to a varying extent. While the relation between risk premia and time-to-maturity is not uniform for CfDs, there is a negative relation for implied area and system forwards, which can be explained by the relative hedging demand of market participants. In addition, we find that risk premia of CfDs andIn electricity markets, not only does the risk of substantial price variations over time exist, but so does the risk of price variations over space, as prices between locations can differ due to transmission congestion. To manage this risk, Contracts for Difference (CfDs), i.e., forwards on the spread between a particular area price and the (unconstrained) system price, were introduced at the Scandinavian electricity exchange Nord Pool at the end of 2000. We empirically investigate the pricing of these CfDs over the period 2001 through 2006 and find that CfD prices contain significant risk premia. Their sign and magnitude, however, differ substantially between areas and delivery periods, because areas are subject to transmission congestion to a varying extent. While the relation between risk premia and time-to-maturity is not uniform for CfDs, there is a negative relation for implied area and system forwards, which can be explained by the relative hedging demand of market participants. In addition, we find that risk premia of CfDs and implied area forwards vary systematically with the variance and skewness of the underlying spot prices. This confirms both implications of the Bessembinder and Lemmon [Bessembinder, H., Lemmon, M.L., 2002. Equilibrium pricing and optimal hedging in electricity forward markets. Journal of Finance, 57, 1347–1382] model.zeige mehrzeige weniger

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Metadaten
Fakultät / Lehrstuhl:Fakultät Sozial- und Wirtschaftswissenschaften / Lehrstuhl für Betriebswirtschaftslehre, insbesondere Banking und Finanzcontrolling
Autor(en):Jan Marckhoff, Jens Wimschulte
Titel der Zeitschrift/Sammelwerk (Englisch):Energy Economics
Verlagsort:Amsterdam
Verlag:Elsevier
Erscheinungsjahr:2009
Ausgabe/Heft:31 (2009), 2
Seitenzahl / Größe (KB):S. 257 - 268 : graph. Darst.
Jahr der Erstpublikation / Fertigstellung:2009
Freie Schlagwort(e):Contract for Difference; Electricity; Implied area forward; Risk premium
URL:http://www.sciencedirect.com/science/article/pii/S0140988308001618
Dokumentart:Artikel in einer Zeitschrift / Postprint
Sprache(n):Englisch
Veröffentlichende Institution:Otto-Friedrich-Universität Bamberg
Datum der Freischaltung:15.11.2012
Lizenz (Deutsch):License LogoKeine Lizenz

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