Testing the Efficiency of Electricity Markets Using a New Composite Measure Based on Nonlinear TS Tools

In this paper we examine and compare the efficiency of four European electricity markets (NordPool, Italian, Spanish and Greek) of different microstructure and level of maturity, by testing the weak form of the Efficient Market Hypothesis (EMH). To quantify the level of efficiency deviation of each market from the ‘ideal’ or ‘benchmark market of random walk’, we have constructed a Composite Electricity Market Efficiency Index (EMEI), inspired by similar works on other energy commodities. The proposed index consists of linear and nonlinear components each one measuring a different feature or dimension of the market efficiency such as its complexity, fractality, entropy, long-term memory or correlation, all connected to the associated benchmark values of the Random Walk Process (RWP). The key findings are that overall, all examined electricity markets are inefficient in respect to the weak form of EMH and the less inefficient market, as measured by the EMEI is the NordPool, closely followed by the Spanish market, with the Italian being the third. The most inefficient market is the Greek one. These results are in accordance with the predominant view about the maturity of these markets. This study contributes significantly on improving the research framework in developing consistent and robust tools for efficiency measurement, while the proposed index can be a valuable tool in designing improved guidelines towards enhancing the efficiency of electricity markets.