Volatility in Electricity Derivative Markets: The Samuelson Effect Revisited

36 Pages Posted: 30 Apr 2014 Last revised: 19 Feb 2017

See all articles by Edouard Jaeck

Edouard Jaeck

Université Paris Dauphine - Department of Finance; EDF Energy - Finance for Energy Market Research Centre

Delphine Lautier

University Paris Dauphine

Date Written: July 18, 2016

Abstract

This article proposes an empirical study of the Samuelson effect in electricity markets. Our motivations are twofold. First, although the literature largely assesses the decreasing pattern in the volatilities along the price curve in commodity markets, it has not extensively tested the presence of such a dynamic feature in electricity prices. Second, the analysis of a non-storable commodity enriches the literature on the behavior of commodity prices. Indeed, it has been sometimes asserted that the Samuelson effect results from the presence of inventories. We examine the four most important electricity futures markets worldwide for the period from 2008 to 2014: the German, Nordic, Australian, and US markets. We also use the American crude oil market as a benchmark for a storable commodity negotiated on a mature futures market. Our analysis has two steps: i) in addition to the traditional tests, we propose and test a new empirical implication of the Samuelson effect: price shocks should spread from the physical market to the paper market, and not the reverse; ii) based on the concept of "indirect storability", we investigate the link between the Samuelson effect and the storability of the commodity. We find evidence of a Samuelson effect in all of the electricity markets and show that storage is not a necessary condition for such an effect to appear. These results should be taken into account for the understanding of the dynamic behavior of commodity prices, for the valuation of electricity assets, and for hedging operations.

Keywords: Samuelson effect, Commodity futures, Energy derivative markets, Electricity, Indirect storability, Volatility spillovers

JEL Classification: C22, G13, G15, Q41

Suggested Citation

Jaeck, Edouard and Lautier, Delphine, Volatility in Electricity Derivative Markets: The Samuelson Effect Revisited (July 18, 2016). Energy Economics, Vol. 59, 2016, Available at SSRN: https://ssrn.com/abstract=2430166 or http://dx.doi.org/10.2139/ssrn.2430166

Edouard Jaeck (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

EDF Energy - Finance for Energy Market Research Centre ( email )

France

Delphine Lautier

University Paris Dauphine ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

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