Electricity future market efficiency testing: the characteristics of electricity prices

Abstract

The under going rapid world wide deregulation of electricity market leading to more competition, increased volatility in energy prices and exposing participants to potentially much greater risks. Along with the market deregulation, a primary derivative market has been established, within the derivative market, long and short term futures and options are being traded. The purpose of establishing the financial market is to facilitate the electricity utilities to hedge the risks. The major concern now on the market development is how efficient the market is. To the market participants, it will be hard for them to determine the operating strategy without realizing the market efficiency level. The paper emphasizes the issue of testing market efficiency, discussing the unique characteristics of electricity prices series and how to choose the proper efficiency testing model. Augmented Dickey-Fuller test on stationary for Australia real spot market prices and future contracts prices series and rational expectations model for market efficiency test have been conducted