Torro, Hipolit (2009): Assessing the influence of spot price predictability on electricity futures hedging.

PDF
MPRA_paper_18892.pdf Download (258kB)  Preview 
Abstract
A common feature of energy prices is that spot price changes are partially predictable due to weather and demand seasonalities. This paper follows the Ederington and Salas (2008) framework and considers the expected change in spot prices when minimum variance hedge ratios are computed. The poor effectiveness of hedging strategies obtained in previous studies on electricity was because the standard hedging approach underestimates the effectiveness of hedging. In the empirical study made in this paper, weekly spot price risk is hedged with weekly futures in the Nord Pool electricity market. In this case, the optimal selection of the futures contract may produce risk reductions whose values vary between 60% and 80% – depending on the hedging duration (one to three weeks) and the analysed subperiod (insample and outofsample subperiods).
Item Type:  MPRA Paper 

Original Title:  Assessing the influence of spot price predictability on electricity futures hedging 
Language:  English 
Keywords:  electricity markets; futures; hedging ratio;electricity price risk 
Subjects:  G  Financial Economics > G1  General Financial Markets > G11  Portfolio Choice ; Investment Decisions L  Industrial Organization > L9  Industry Studies: Transportation and Utilities > L94  Electric Utilities G  Financial Economics > G1  General Financial Markets > G13  Contingent Pricing ; Futures Pricing 
Item ID:  18892 
Depositing User:  Hipòlit Torró 
Date Deposited:  29. Nov 2009 12:39 
Last Modified:  15. Mar 2015 08:00 
References:  Baillie, R. T. & Myers, R. J. (1991) Bivariate GARCH estimation of the optimal commodity futures hedge. Journal of Applied Econometrics, 6, 10924. Bauwens, L., Laurent, S. & Rombouts J. V. K. (2006). Multivariate GARCH models: a survey. Journal of Applied Econometrics, 21, 79109. Bekaert, G., & Wu, G. (2000). Asymmetric volatility and risk in equity markets. The Review of Financial Studies, 13, 142. Bollerslev, T. (1990). Modelling the coherence in shortrun nominal rates: a multivariate generalized ARCH approach. Review of Economics and Statistics, 72, 498505. Bollerslev, T., & Wooldrige, J. M. (1992). Quasimaximum likelihood estimation and inference in models with time varying covariances. Econometric Review, 11, 14372. Bollerslev, T., Engle R. F., & Wooldrige, J. M. (1988). A capital asset pricing model with time varying covariances. Journal of Political Economy, 96, 11631. Bystrom, H. N. (2003). The hedging performance of electricity futures on the Nordic power exchange. Applied Economics, 35, 111. Carter, C. A. (1999). Commodity futures markets: a survey. The Australian Journal of Agricultural and Resource Economics, 43, 20947. Cecchetti, S. G., Cumby, R. E., & Figlewski, S. (1988). Estimation of the optimal futures hedge. Review of Economics and Statistics, 70, 62330. Ederington, L. H. (1979). The hedging performance of the new futures markets. Journal of Finance, 34, 157170. Ederington, L. H., & Salas, J. M. (2008). Minimum variance hedging when spot price changes are partially predictable. Journal of Banking and Finance, 32, 654663. Engle, R. F., & Granger, C. W. (1987). Cointegration and error correction: representation, estimation and testing. Econometrica, 55, 25176. Engle, R. F., & Kroner, K. F. (1995). Multivariate simultaneous generalized ARCH. Econometric Theory, 11, 12250. Engle, R. F., & Ng, V. K. (1993). Measuring and testing the impact of news on volatilily. The Journal of Finance, 48, 1749 – 78. Engle, R.F., Mustafa, C., & Rice, J. (1992). Modelling Peak Electricity Demand. Journal of Forecasting, 11, 241251. Fama, E. F., & French, K. R. (1987). Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage. Journal of Business, 60, 5574. Gagnon, L., & Lypny, G. (1995). Hedging shortterm interest risk under timevarying distributions. The Journal of Futures Markets, 15, 767783. Glosten, L. R., Jagannathan, R., & Runkel, D. E. (1993). On the relation between the expected value and volatility of nominal excess return on stocks. The Journal of Finance, 48, 1779801. Hendry, O. L., & Sharma, J. (1999). Asymmetric conditional volatility and firm size: evidence from Australian equity portfolios. Australian Economic Papers, 38, 393406. Henley, A., & Peirson, J. (1998). Residential Energy Demand and The Interaction of Price and Temperature: British Experimental Evidence. Energy Economics, 20, 157171. Hentschel, L. (1995). All in the family: nesting symmetric and asymmetric GARCH models. Journal of Financial Economics, 39, 71104. Hull, J. C. (2006). Options, futures and other derivatives. Prentice Hall, New Jersey. Sixth edition. Koopman, S. J., Ooms, M., & Carnero M. A. (2007). Periodic seasonal RegARFIMAGARCH models for daily electricity spot prices. Journal of the American Statistical Association, 102, 1627. Kroner, K. F., & Ng, V. K. (1998). Modeling asymmetric comovements of asset returns. The Review of Financial Studies, 11, 81744. Kroner, K. F., & Sultan J. (1993). Timevarying distributions and dynamic hedging with foreign currency futures. Journal of Financial and Quantitative Analysis, 28, 53551. Li, X., & Sailor, D.J. (1995). Electricity Use Sensitivity to Climate and Climate Change. World Resource Review, 3, 334346. Lien, D. (1996). The Effect of the Cointegration Relationship on Futures Hedging: A Note. The Journal of Futures Markets, 16, 773780. Lien, D., & Tse, Y. K. (2002). Some recent developments in futures hedging. Journal of Economic Surveys, 16, 35796. Lindahl, M. (1992). Minimum variance hedge ratios for stocks index futures: duration and expiration effects. The Journal of Futures Markets, 12, 40313. Lucia, J. J., & Torró H. (2008). ShortTerm Electricity Futures Prices: Evidence on the TimeVarying Risk Premium. Instituto Valenciano de Investigaciones Económicas, WPEC200808. Meneu, V., & Torró, H. (2003). Asymmetric covariance in spotfutures markets. The Journal of Futures Markets, 23, 101948. Moulton, J. S. (2005). California electricity futures: The NYMEX experience. Energy Economics, 27, 18194. Myers, R. J. (1991). Estimating timevarying optimal hedge ratios on futures markets. The Journal of Futures Markets, 11, 3953. Pardo, A., Meneu V., & Valor, E. (2002). Temperature and Seasonality Influences on Spanish Electricity Load. Energy Economics, 2, 5570. Park, T. H., & Switzer, L. N. (1995). Bivariate GARCH estimation of the optimal hedge ratios for stock index futures: a note. The Journal of Futures Markets, 15, 617. Peirson, J., & Henley, A. (1994). Electricity Load and Temperature. Issues in Dynamic Specification. Energy Economics, 16, 235243. Sailor, D.J., and Muñoz, J.R. (1997). Sensitivity of Electricity and Natural Gas Consumption to Climate in the USA  Methodology and Results for Eight States. Energy, 22, 987998. Viswanath, P.V. (1993). Eficient Use of Information, Convergence Adjustaments, and Regression Estimates of Hedges Ratios. The Journal of Futures Markets, 13, 4353. von der Fehr, N.H. M., Amundsen, E., and Bergman, L. (2005). The Nordic market: signs of stress? The Energy Journal, Special Edition on European Electricity Liberalisation, July, 7198. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/18892 