The efficacy of financial futures as a hedging tool in electricity markets
Jim Hanly (),
Lucia Morales and
International Journal of Finance & Economics, 2018, vol. 23, issue 1, 29-40
This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to 3 of the most actively traded European electricity markets, Nordpool, APXUK, and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for 2 hedging horizons, weekly and monthly using both Variance and Value at Risk. Our key finding is that electricity futures can effectively manage risk only for specific time periods when using hedging strategies that have been very successful in financial and other commodity markets. More generally, they are ineffective as a risk management tool when compared with other energy assets. This is especially true at the weekly frequency. We also find significant differences in both the optimal hedge ratios and the hedging effectiveness of the different electricity markets. Better performance is found for the Nordpool market, whereas the poorest performer in hedging terms is the Phelix market.
References: Add references at CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:23:y:2018:i:1:p:29-40
Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307
Access Statistics for this article
International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley
More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().