Pricing of Electricity Futures Based on Locational Price Differences: The Case of Finland

44 Pages Posted: 26 Aug 2017

See all articles by Juha-Pekka Junttila

Juha-Pekka Junttila

University of Oulu - Department of Economics, Accounting and Finance; University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF)

Valtteri Myllymäki

Fortum Oyj

Juhani Raatikainen

University of Jyväskylä - School of Business and Economics

Date Written: May 11, 2017

Abstract

We find that the pricing of Finnish electricity market futures has been inefficient during the latest 10 years, when the trading volumes of Electricity Price Area Differentials (EPADs) have more than doubled. Even though the calculated futures premium on EPADs is related to some risk measures and the variables capturing the demand and supply conditions in the spot electricity markets, there has been a significant positive excess futures premium in the Finnish market, and financial market participants should have been able to utilize this also in economic terms. This finding is new and relevant for the participants of the Nordic electricity markets also in the future, because both the speculative and hedging-based trading is increasing in the Nordic markets.

Keywords: Risk Premium, Electricity Futures, EPAD, Nordic Electricity Market, Arbitrage

JEL Classification: G13, G14, Q41

Suggested Citation

Junttila, Juha-Pekka and Myllymäki, Valtteri and Raatikainen, Juhani, Pricing of Electricity Futures Based on Locational Price Differences: The Case of Finland (May 11, 2017). Available at SSRN: https://ssrn.com/abstract=3024632 or http://dx.doi.org/10.2139/ssrn.3024632

Juha-Pekka Junttila (Contact Author)

University of Oulu - Department of Economics, Accounting and Finance ( email )

P.O. Box 4600
Oulu, 90014
Finland

University of Jyväskylä - Jyväskylä International Macro & Finance Research Group (JyIMaF) ( email )

PO Box 35
Jyväskylä
Finland

Valtteri Myllymäki

Fortum Oyj ( email )

PO Box 100
Fortum, 00048
Finland

Juhani Raatikainen

University of Jyväskylä - School of Business and Economics ( email )

University of Jyväskylä
PO Box 35
FIN 40351, FIN-40014
Finland

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