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Pricing of electricity futures based on locational price differences: The case of Finland

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  • Junttila, Juha
  • Myllymäki, Valtteri
  • Raatikainen, Juhani

Abstract

We find that the pricing of Finnish electricity market futures has been inefficient during the latest 10 years, when the trading volumes of Electricity Price Area Differentials (EPADs) have more than doubled. Even though the calculated futures premium on EPADs is related to some risk measures and the variables capturing the demand and supply conditions in the spot electricity markets, there has been a significant positive excess futures premium in the Finnish market, and financial market participants should have been able to utilize this also in economic terms. This finding is new and relevant for the participants of the Nordic electricity markets also in the future, because both the speculative and hedging-based trading is increasing in the Nordic markets.

Suggested Citation

  • Junttila, Juha & Myllymäki, Valtteri & Raatikainen, Juhani, 2018. "Pricing of electricity futures based on locational price differences: The case of Finland," Energy Economics, Elsevier, vol. 71(C), pages 222-237.
    • Handle: RePEc:eee:eneeco:v:71:y:2018:i:c:p:222-237
    DOI: 10.1016/j.eneco.2018.02.018
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    6. Bevin-McCrimmon, Fergus & Diaz-Rainey, Ivan & McCarten, Matthew & Sise, Greg, 2018. "Liquidity and risk premia in electricity futures," Energy Economics, Elsevier, vol. 75(C), pages 503-517.
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    More about this item

    Keywords

    Risk premium; Electricity futures; EPAD; Nordic electricity market; Arbitrage;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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