The hedging effectiveness of electricity futures in the Spanish market

Juan Ignacio Peña

Finance Research Letters, 2023, vol. 53, issue C

Abstract: This paper studies the year-by-year and month-by-month (the same month in all years) hedging effectiveness of futures contracts in the Spanish electricity market from 2007 to 2022. We compare the in-sample and out-of-sample hedging ability of naïve, minimum variance, partially predictable, non-parametric, and BEKK_T hedge ratios. Hedging effectiveness varies over time and across months because of unstable correlations between spot price changes and futures price changes. Some methods present meaningful in-sample performance, but the out-of-sample hedging effectiveness is limited. The hedging effectiveness of the naïve ratio on a year-by-year (month-by-month) basis, with monthly differences, is 16% (40%).

Keywords: Electricity markets; Optimal hedge ratio; Futures contracts; Hedge effectiveness (search for similar items in EconPapers)
JEL-codes: C22 C51 C52 G13 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322006833

DOI: 10.1016/j.frl.2022.103507

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