Intra- and inter-commodity price relationships in electricity and natural gas spot and futures markets.

Abstract

Essay 2 examines why electricity futures contracts are failing despite apparent need for hedging instruments. Consistent with my hypothesis, empirical results find that the hedging protection provided by electricity futures contracts decreased and led to the decline of the futures market. I attribute the deterioration in hedging effectiveness to the mismatch between futures and spot prices, which arises from the non-storability of electricity, the futures contracts' delivery methods and the exceptional spot price volatility. The effectiveness of a cross hedge by using natural gas futures is also examined but turns out to be very weak.

Essay 3 studies the inter-commodity price relationships. The spread between electricity and natural gas prices is known as the "spark spread." This essay examines the time-series properties of this spread and determines whether it exhibits mean-reversion that traders can exploit. The study finds that there is both statistically and economically significant mean-reversion in electricity futures prices. And the profits generated in the simulation are mostly from the electricity side of the transactions.

Essay 1 investigates the market evolution and integration in the electricity spot and futures markets in the context of electricity deregulation in the entire US. The application of market integration statistical tests provides evidence of increasing market integration in the spot markets but not in the futures markets. There is mixed evidence that market integration within the same area is stronger than across different areas.

This dissertation explores the intra- and inter-commodity price relationships in the electricity and natural gas markets. It is composed of three empirical essays.