Supply, demand, and risk premiums in electricity markets

Kris Jacobs, Yu Li and Craig Pirrong

Journal of Banking & Finance, 2022, vol. 135, issue C

Abstract: We model the impact of supply and demand on risk premiums in electricity futures, using daily data for 2003–2014. The model provides a satisfactory fit and allows for unspanned economic risk not embedded in futures prices. Model-implied spot risk premiums and forward biases are large, negative, highly time-varying, and exhibit plausible seasonal patterns. They differ from existing models, especially in periods of market turmoil, have not decreased in size over time, and help predict future returns. Both demand and supply have an economically significant impact on risk premiums. The risk premium associated with supply is characterized by large positive outliers.

Keywords: Electricity futures; Economic determinants; Supply; Demand; Risk premium; Unspanned risk (search for similar items in EconPapers)
JEL-codes: G12 G13 Q02 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:135:y:2022:i:c:s0378426621003411

DOI: 10.1016/j.jbankfin.2021.106390

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