Julio J. Lucia

Electricity prices and power derivatives: Evidence from the Nordic Power Exchange

This paper examines the importance of the regular pattern in the behavior of electricity prices, and its implications for the purposes of derivative pricing. We analyze the Nordic Power Exchanges spot, futures, and forward prices. We conclude that the seasonal systematic pattern throughout the year, in particular, is of crucial importance in explaining the shape of the futures/forward curve. Moreover, in the context of the oneand two factor models analyzed in this paper, a simple sinusoidal functionis adequate in order capture the seasonal pattern of the features and forwardcurve directly implied by the seasonal behavior of spot electricity prices.

Short-Term Electricity Futures Prices: Evidence on the Time-Varying Risk Premium

This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of year 2002, the variation of the risk premiums was related to the variance and the skewness of future spot prices. This result is consistent with the view that risk considerations played a role in the determination of futures prices. Finally, additional evidence provided throughout the paper supports the view that circumstances changed in the Nord Pool market after the shock period. Este trabajo estudia la relacion entre los precios de contado y a futuro de la electricidad a traves de un analisis empirico realizado sobre los precios a futuro a corto plazo negociados durante una decada en el mercado nordico de electricidad, Nord Pool. Los resultados indican que existen primas de riesgo positivas en media en los contratos de futuro a corto plazo. Sin embargo, la significatividad y tamano de las primas varia estacionalmente a lo largo del ano, siendo las de mayor tamano durante el invierno y nulas durante el verano. Tambien se encuentra evidencia significativa relativa a la capacidad explicativa de los niveles anormalmente bajos de las reservas hidraulicas sobre la variacion temporal de las primas de riesgo. Ademas, antes del shock de oferta que azoto el mercado Nord Pool a finales del ano 2002, la variacion de las primas de riesgo estaba relacionada con la varianza y asimetria de los precios futuros de la electricidad. Este resultado es coherente con la vision de que el riesgo se tomaba en consideracion en la determinacion de los precios a futuro. Finalmente, a lo largo de todo el documento se muestra evidencia adicional a favor de la opinion de que las cirscustancias cambiaron en el Nord Pool despues del periodo turbulento.

On measuring speculative and hedging activities in futures markets from volume and open interest data

This article provides a critical assessment of the line of research that measures speculative and hedging activities in futures markets from volume and open interest data. It makes several contributions. First, a detailed theoretical analysis of the measures proposed in the previous literature as proxies for speculative activity clarifies the circumstances in which they fail, as well as the assumptions that have to be made, when they are used as intended. Second, we propose a new way of combining the volume and the open interest figures, which provides additional information regarding the type of trading activity that takes place in the market on a given date. Finally, we analyse empirically the basic statistical properties of all the ratios when they are applied to real data for some of the stock index futures contracts most actively traded in the world. This empirical analysis shows the diverse behaviour of the ratios when they are applied to a common sample of real data, which confirms our previous theoretical findings. Our contributions should be taken into account when any of the measures is used as a proxy for the relative importance of speculative demand in empirical analyses.

How Financial Theory Applies to Catastrophe-Linked Derivatives. An Empirical Test of Several Pricing Models

The paper focuses on the PCS Catastrophe Insurance Option Contracts and empirically tests the degree of agreement between their real quotes and the standard fmancial theory. The highest possible precision is incorporated since the real quotes are perfectly synchronized and the bid-ask spread is always considered. A static setting is assumed and the main topics of arbitrage, hedging and portfolio choice are involved in the analysis. Three significant conclusions are reached. First, the catastrophe derivatives may be very often priced by arbitrage methods, and the paper provides some examples of practical strategies that were available in the market. Second, hedging arguments also yield adequate criteria to price the derivatives and some real examples are provided as well. Third, in a variance aversion context many agents could be interested in selling derivatives to invest the money in stocks and bonds. These strategies show a suitable level in the variance for any desired expected return. Furthermore, the methodology here applied seems to be quite general and may be useful to price other derivative securities. Simple assumptions on the underlying asset behavior are the only required conditions.

Speculative and hedging activities in the European Carbon Market

We explore the dynamics of the speculative and hedging activities in futures carbon markets by using volume and open interest data. A comparison of the three phases in the European Carbon Market reveals that (i) Phase II of the EU ETS seems to be the most speculative phase to date and (ii) the highest degree of speculative activity for every single phase occurs at the moment of listing the contracts for the first time. A seasonality analysis identifies a higher level of speculation in the first quarter of each year, related to the schedule of deadlines of the EU ETS. Further analysis confirms that most of the speculative activity each year occurs in the front contract, whereas the hedging demand concentrates in the second-to-deliver futures contract.

Open and Closed Positions and Stock Index Futures Volatility

In this paper we analyze the relationship between volatility in index futures markets and the number of open and closed positions. We observe that, in general both positions are positively correlated with contemporaneous volatility, and the opposite effect is detected on the following day for all indexes. Additionally, we observe a stronger positive relationship on days characterized by extreme movements of these contracting movements dominating the market. Finally, our findings suggest that day-traders are not associated to an increment of volatility, whereas uninformed traders, both opening and closing their positions, have to do with a rise in volatility.