Document Type

Working Paper

Rights

Available under a Creative Commons Attribution Non-Commercial Share Alike 4.0 International Licence

Disciplines

Economics

Abstract

This paper estimates and applies a risk management strategy for electricity spot exposures using futures hedging. We apply our approach to three of the most actively traded European electricity markets, Nordpool, APXUK and Phelix. We compare both optimal hedging strategies and the hedging effectiveness of these markets for two hedging horizons, weekly and monthly using both Variance and Value at Risk (VaR). We find significant differences in both the Optimal Hedge Ratios (OHR’s) and the hedging effectiveness of the different electricity markets. Better performance is found for the Nordpool market while the poorest performer in hedging terms is Phelix. However we also find that electricity futures hedging arerelatively ineffective as a risk management tool when compared with other energy assets. This isespecially true at the weekly frequency.

DOI

https://doi.org/10.2139/ssrn.2607490

Funder

DIT

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