Time-zero efficiency of European power derivatives markets. (August 2016)

• Record Type: Journal Article
• Authors: Peña, Juan Ignacio; Rodriguez, Rosa
• Is Part Of: Energy policy. Volume 95(2016)
• Page Start: 253
• Page End: 268
• Publication Date: 2016-08
• Subjects: C51 -- G13 -- L94 -- Q40; Time-zero efficiency -- Power derivatives -- Law of one price -- Trading rules -- Electricity swaps; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2016.05.010
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: We study time-zero efficiency of electricity derivatives markets. By time-zero efficiency is meant a sequence of prices of derivatives contracts having the same underlying asset but different times to maturity which implies that prices comply with a set of efficiency conditions that prevent profitable time-zero arbitrage opportunities. We investigate whether statistical tests, based on the law of one price, and trading rules, based on price differentials and no-arbitrage violations, are useful for assessing time-zero efficiency. We apply tests and trading rules to daily data of three European power markets: Germany, France and Spain. In the case of the German market, after considering liquidity availability and transaction costs, results are not inconsistent with time-zero efficiency. However, in the case of the French and Spanish markets, limitations in liquidity and representativeness are challenges that prevent definite conclusions. Liquidity in French and Spanish markets should improve by using pricing and marketing incentives. These incentives should attract more participants into the electricity derivatives exchanges and should encourage them to settle OTC trades in clearinghouses. Publication of statistics on prices, volumes and open interest per type of participant should be promoted. Highlights: We test time-zero efficiency of derivatives power markets in Germany, France and Spain. Prices in Germany, considering liquidity and transaction costs, are time-zero efficient. In France and Spain, limitations in liquidity and representativeness prevent conclusions. Liquidity in France and Spain should improve by using pricing and marketing incentives. Incentives attract participants to exchanges and encourage them to settle OTC trades in clearinghouses.