Mr Richard Biegler-König, University of Duisburg-Essen
The electricity market is special – it features a homogeneous good with prices driven by the technical restriction of the merit order. The most striking distinction to other commodities (and financial assets) is the non-storability of electricity.
Hence, the relationship between spot and forward prices cannot be explained by standard no-arbitrage arguments and thus, the classical spot-forward (i.e. the forward equals the expected spot under a risk-neutral measure and the historical filtration) is invalid. There exists an information asymmetry between spot and forward. To illustrate the effect on prices consider the announcement of a power plant to be closed down for, say, maintenance reasons in the future. Obviously, this will result in higher forward prices. Still, this information will have no effect on current spot prices as no arbitrage possibilities arise, i.e. we cannot buy the underlying now and sell in the future.
Thus, in our paper we complement the historical filtration as generated by the spot process with additional future information. This is done by means of the mathematical theory of the initial enlargement of filtration (French \”grossissement initial de filtration\”). We then introduce the Information Premium as the difference between the forward price under the finer (market) filtration and the coarser (historical) filtration. We show briefly how to explicitly calculate analytical expressions for the premium with a simple, yet widely used spot model.
Furthermore, we present a method to test for the existence, and identify a time series, of this information premium empirically. This turns out to be non-trivial as the premium is not measurable with respect to the historical filtration. Thus, the usual approach, a mere measure change is not possible. Instead, we propose a method involving regressions and Hilbert-space representations.
We discuss two market scenarios from the EEX exhibiting a significant information premium: firstly, the beginning of the second phase of the EUETS when the market anticipated additional costs due to CO2-certificates. Secondly, the so-called \”Atom-Moratorium\” following the Japan Earthquake 2011 by which the German government decided to close down eight nuclear power plants immediately. This resulted in a jump in forward prices while it had no effect on the spot.Information-Premium-and-the-German-Atom-Moratorium.pdf 1.07 MBBiegler-König-An-empirical-study-of-the-information-premium-on-electricity-markets.pdf 1.17 MB