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The forward premium in electricity markets: An experimental study

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  • van Koten, Silvester

Abstract

I perform the first experimental test of Bessembinder and Lemmon's (2002) seminal risk premium theory. The theory predicts that forward premia in electricity markets are determined by the statistical properties of demand. However, the existing empirical evidence is mixed, possibly due to the lack of observability of key variables. Specifically, the experiment tests if an increase in the variance of demand makes the forward premia more negative for specific parameters and implementation details. The experimental results corroborate the theoretical predictions.

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  • van Koten, Silvester, 2021. "The forward premium in electricity markets: An experimental study," Energy Economics, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:eneeco:v:94:y:2021:i:c:s0140988320303996
    DOI: 10.1016/j.eneco.2020.105059
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    More about this item

    Keywords

    Forward Premia; Electricity markets; Economic experiments;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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