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The hedging effectiveness of electricity futures in the Spanish market

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URI: https://hdl.handle.net/10016/38465
ISSN: 1544-6123
DOI: https://doi.org/10.1016/j.frl.2022.103507
UXXI: AR/0000033394
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hedging_FRL_2023.pdf (403.73 KB)
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2023-05
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Elsevier
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This paper studies the year-by-year and month-by-month (the same month in all years) hedging effectiveness of futures contracts in the Spanish electricity market from 2007 to 2022. We compare the in-sample and out-of-sample hedging ability of naïve, minimum variance, partially predictable, non-parametric, and BEKK_T hedge ratios. Hedging effectiveness varies over time and across months because of unstable correlations between spot price changes and futures price changes. Some methods present meaningful in-sample performance, but the out-of-sample hedging effectiveness is limited. The hedging effectiveness of the naïve ratio on a year-by-year (month-by-month) basis, with monthly differences, is 16% (40%).
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Electricity markets, Optimal hedge ratio, Futures contracts, Hedge effectiveness
Bibliographic citation
Peña, J. I. (2023). The hedging effectiveness of electricity futures in the Spanish market. Finance Research Letters, 53, 103507.
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