Pricing of electricity futures based on locational price differences: The case of Finland

Juha Junttila, Valtteri Myllymäki and Juhani Raatikainen

Energy Economics, 2018, vol. 71, issue C, 222-237

Abstract: We find that the pricing of Finnish electricity market futures has been inefficient during the latest 10 years, when the trading volumes of Electricity Price Area Differentials (EPADs) have more than doubled. Even though the calculated futures premium on EPADs is related to some risk measures and the variables capturing the demand and supply conditions in the spot electricity markets, there has been a significant positive excess futures premium in the Finnish market, and financial market participants should have been able to utilize this also in economic terms. This finding is new and relevant for the participants of the Nordic electricity markets also in the future, because both the speculative and hedging-based trading is increasing in the Nordic markets.

Keywords: Risk premium; Electricity futures; EPAD; Nordic electricity market; Arbitrage (search for similar items in EconPapers)
JEL-codes: G13 G14 Q41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:71:y:2018:i:c:p:222-237

DOI: 10.1016/j.eneco.2018.02.018

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