Electricity Forward Prices: A High-Frequency Empirical Analysis

Authors

  • Francis A. Longstaff,

  • Ashley W. Wang

    Search for more papers by this author
    • Francis Longstaff is from the Anderson School at UCLA and the NBER. Ashley W. Wang is from the Graduate School of Management, UC Irvine. We are grateful for helpful discussions with Scott Benner, Hank Bessembinder, David Hirshleifer, Jason Hsu, Mitz Igarashi, Michael Lemmon, Max Moroz, Richard Roll, Bryan Routledge, Pedro Santa-Clara, and Duane Seppi, and for the comments of seminar participants at the University of California Energy Institute at Berkeley, the University of California at Davis, the University of California at Irvine, the Mathematical Science and Research Institute Event Risk Conference, and the 2003 Western Finance Association meetings. We are particularly grateful for the valuable comments and assistance with data issues that we received from Severin Borenstein, James Bushnell, Chris Knittel, and Catherine Wolfram. Finally, we express our appreciation for the comments of the editor Richard Green and of an anonymous referee. All errors are our responsibility.


ABSTRACT

We conduct an empirical analysis of forward prices in the PJM electricity market using a high-frequency data set of hourly spot and day-ahead forward prices. We find that there are significant risk premia in electricity forward prices. These premia vary systematically throughout the day and are directly related to economic risk factors, such as the volatility of unexpected changes in demand, spot prices, and total revenues. These results support the hypothesis that electricity forward prices in the Pennsylvania, New Jersey, and Maryland market are determined rationally by risk-averse economic agents.

Ancillary