Empirical evaluation of the efficiency of the Iberian power futures market
Abstract: Market efficiency is
analysed for the Iberian Power Futures Market and other European Power Markets,
as well as other fuel markets through evaluation of ex-post Forward Risk Premium.
The equilibrium price from compulsory call auctions for distribution companies
within the framework of the Iberian Power Futures Market is not optimal for
remuneration purposes as it seems to be slightly upward biased, though such a
premium is not significant (only around 2% above the average of Settlement
Prices). In the period considered (August 2006 to September 2008), monthly
futures contracts behave similarly to quarterly contracts. Average risk premia
have been positive in power and natural gas markets but negative in oil and
coal markets. Different hypotheses are tested regarding increasing volatility
with maturity and regarding Forward Risk Premium correlations (negative with
variance of spot prices during delivery period and positive with skewness of
spot prices during delivery period). Enlarged data sets are recommended for
stronger test results. Energy markets tend to show limited levels of market
efficiency. Regarding the emerging Iberian Power Futures Market, price
efficiency is improved with market development and with further integration of
European Regional Power Markets.
Author: Álvaro Capitán
Herráiz, Carlos Rodríguez Monroy
Journal Code: jptindustrigg080017
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