Risk premia in the German electricity futures market

Abstract

The mechanism behind price formation in electricity futures markets is still under discussion. Theory suggests that hedging pressure caused by deviating risk preferences is the most promising approach. This paper contributes to the discussion through an empirical investigation of electricity futures for delivery in Germany traded at the European Energy Exchange (EEX). We analyse the futures from an ex post perspective and find evidence for significant positive risk premia at the short-end. Furthermore, we detect the existence of a term structure of risk premia and the existence of seasonality in the risk premia. When testing for factors influencing the risk premia the results suggest that risk premia are directly related to factors linked to risk considerations.