IDEAS home Printed from https://ideas.repec.org/p/wuu/wpaper/hsc1306.html
   My bibliography  Save this paper

Relationship between spot and futures prices in electricity markets: Pitfalls of regression analysis

Author

Listed:
  • Michal Zator

Abstract

This work discusses potential pitfalls of applying linear regression models to explaining the relationship between spot and futures prices in electricity markets. We briefly introduce the theory for the analysis of the spot-futures price relationship and highlight selected issues of multiple regression models.We show the bias coming from the simultaneity problem, analyze the effect of correlated measurement errors in both dependent and independent variables and discuss the properties of coefficients estimated in the presence of a seasonal component and without it. We show that these problems appear in the work of Botterud, Kristiansen, and Ilic (2010), who analyze the relationship between spot and futures prices in the Nord Pool power exchange. We study a very similar dataset and show that the conclusions of Botterud et al. are partially invalid or misleading. In particular, the effect of the water reservoir level on the risk premium is likely to be positive, which is to be expected, but contradicts Botterud et al. results. In addition we show that the coeffcients obtained by Botterud et al. can be interpreted only when we consider the ex-post risk premium and not the ex-ante one.

Suggested Citation

  • Michal Zator, 2013. "Relationship between spot and futures prices in electricity markets: Pitfalls of regression analysis," HSC Research Reports HSC/13/06, Hugo Steinhaus Center, Wroclaw University of Technology.
    • Handle: RePEc:wuu:wpaper:hsc1306
    as

    Download full text from publisher

    File URL: http://www.im.pwr.wroc.pl/~hugo/RePEc/wuu/wpaper/HSC_13_06.pdf
    File Function: Original version, 2013
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. van Koten, Silvester, 2021. "The forward premium in electricity markets: An experimental study," Energy Economics, Elsevier, vol. 94(C).
    2. Weron, Rafał & Zator, Michał, 2014. "Revisiting the relationship between spot and futures prices in the Nord Pool electricity market," Energy Economics, Elsevier, vol. 44(C), pages 178-190.

    More about this item

    Keywords

    electricity markets; risk premium; convenience yield; linear regression; seasonality;
    All these keywords.

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wuu:wpaper:hsc1306. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rafal Weron (email available below). General contact details of provider: https://edirc.repec.org/data/hspwrpl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.