Liquidity and risk premia in electricity futures

Fergus Bevin-McCrimmon, Ivan Diaz-Rainey, Matthew McCarten and Greg Sise

Energy Economics, 2018, vol. 75, issue C, 503-517

Abstract: Research on electricity futures markets has to date not explored the role that market liquidity may play in determining risk premia. Further, no detailed empirical examination of both liquidity and risk premia in the New Zealand electricity futures market are discernible. Using data from October 2009 to December 2015, we address these gaps in the literature. We find that liquidity has been gradually increasing and that a policy intervention to impose a maximum bid-offer spread was associated with liquidity-enhancing structural breaks, but this was evident only in the nearest-to-maturity futures contracts. Further, we develop models to explain risk premia that include a range of risk factors, which we categorise as either statistical, physical market, production cost or liquidity variables. From this analysis, we document significant time-varying premia that are driven by potentially inefficient behaviour. Finally, we find that liquidity risk does affect risk premia, but generally only in the case of longer-dated futures.

Keywords: Electricity markets; Electricity prices; Electricity futures; Liquidity; Risk premia (search for similar items in EconPapers)
JEL-codes: D46 G12 G13 L94 Q41 Q48 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0140988318303700
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:75:y:2018:i:c:p:503-517

DOI: 10.1016/j.eneco.2018.09.002

Access Statistics for this article

Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

More articles in Energy Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().