American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity
American Economic Journal: Economic Policy
vol. 15,
no. 2, May 2023
(pp. 292–330)
Abstract
Forward markets are believed to aggregate information about future spot prices and reduce the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in markets with transaction costs. Using this measure, we show that day-ahead prices better reflect real-time prices at all locations in California's electricity market after the introduction of financial trading. We then present evidence suggesting that operating costs and input fuel use fell after the introduction of financial trading on days when the nonconvexities inherent to the production and transmission of electricity are especially relevant.Citation
Jha, Akshaya, and Frank A. Wolak. 2023. "Can Forward Commodity Markets Improve Spot Market Performance? Evidence from Wholesale Electricity." American Economic Journal: Economic Policy, 15 (2): 292–330. DOI: 10.1257/pol.20200234Additional Materials
JEL Classification
- D23 Organizational Behavior; Transaction Costs; Property Rights
- D24 Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
- G13 Contingent Pricing; Futures Pricing; option pricing
- L94 Electric Utilities
- L98 Industry Studies: Utilities and Transportation: Government Policy
- Q48 Energy: Government Policy
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