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Hedging Effectiveness on the MISO Exchange

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  • Kevin Jones

    (University of Houston-Downtown, USA)

Abstract

The purpose of this paper is to evaluate the effectiveness of four commonly used hedging techniques on wholesale electricity prices within the Midcontinent Independent System Operator (MISO) energy market. This analysis provides and in-depth assessment of hedging performance on one of the largest power markets in North America. In a break from extant literature, hourly time series are used to create hedge portfolios for each of the regional hubs within the MISO footprint. Each risk management strategy is employed on 24 hourly time series for each of the eight regional hubs within the MISO footprint. This results in a total of 768 hedged portfolios across 192 hourly time series. While the naïve approach tends to outperform the others in terms of variance reduction, none of the strategies examined meet the generally accepted standard for a highly effective hedge. In several instances, the hedged portfolio contains a higher amount of risk than the unhedged position. This may be explained by the unique characteristics of wholesale electricity and hedging pressure, particularly during peak demand hours.

Suggested Citation

  • Kevin Jones, 2024. "Hedging Effectiveness on the MISO Exchange," International Journal of Energy Economics and Policy, Econjournals, vol. 14(1), pages 301-311, January.
    • Handle: RePEc:eco:journ2:2024-01-31
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    References listed on IDEAS

    as
    1. Boroumand, Raphaël-Homayoun & Goutte, Stéphane & Guesmi, Khaled & Porcher, Thomas, 2019. "Potential benefits of optimal intra-day electricity hedging for the environment: The perspective of electricity retailers," Energy Policy, Elsevier, vol. 132(C), pages 1120-1129.
    2. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    3. Aitor Ciarreta & Peru Muniain & Ainhoa Zarraga, 2017. "Modeling and forecasting realized volatility in German–Austrian continuous intraday electricity prices," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 36(6), pages 680-690, September.
    4. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-170, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Risk Management; Midwest Independent System Operator; Electricity Derivatives;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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