Partisan Politics Theory and stock market performance: Evidence for Spain
ABSTRACTThis paper examines the influence of Spanish major political events on stock market performance by testing the empirical implications of the existing theories focused on the connection between politics and stock exchanges. On the one hand, our findings give support to the partisan politics theory, since stock returns behave differently depending on the political orientation of the government, not only on the day of the national election but also during their tenure of office. On the other hand, the analytical results demonstrate that there are no abnormal positive returns during the second half of the government's term, which contradicts the opportunistic political business cycle th…
Expectations and forward risk premium in the Spanish deregulated power market
Abstract Deregulation in energy markets has entailed important changes in the way agents conduct business. Price risk arises as a result of fluctuations in the future price of electricity and agents assume long or short positions in the forward and spot markets to hedge their exposure to price risk. The presence of forward risk premium in prices is evidence of the fact that agents act in the market according to risk considerations. This work aims to analyse the information content of the difference between the forward and spot prices (the so-called forward premium) regarding the agents’ decisions. We find that the sign and magnitude of the ex post forward premium depend on the unexpected va…
The reliability of spanish and german electricity forward prices. Databases and price discovery process
Given the existence of different databases from different sources that offer information on forward electricity prices, the need to compare them arises to guarantee that research results and trading decisions based on them are not sensitive to the database used. We worked with forward electricity prices traded over the counter, closest month to maturity, covering the period from 2010 to 2016 for the Spanish over the counter (OTC) market, and from 2008 to 2016 for the German OTC market. The goal of this paper was to test whether there were significant discrepancies between the price series provided by two of the main agencies of financial information (Thomson Reuters and Bloomberg), as well …
Impact of Wind Electricity Forecasts on Bidding Strategies
The change in the generation mix from conventional electricity sources to renewables has important implications for bidding behaviour and may have an impact on prices. The main goal of this work is to discover the role played by expected wind production, together with other relevant factors, in explaining the day-ahead market price through a data panel model. The Spanish market, given the huge increase in wind generation observed in the last decade, has been chosen for this study as a paradigmatic example. The results obtained suggest that wind power forecasts are a new key determinant for supply market participants when bidding in the day-ahead market. We also provide a conservative quanti…
Effects of renewables on the stylized facts of electricity prices
Abstract Many countries around the world have increased their renewable installed capacity due to a greater awareness of climate concerns. Under this new framework, with renewables being among the main generation sources, the literature warns of a dramatic change in price behaviour. Some of the most commonly claimed effects of having a significant proportion of renewable generating sources in the total electricity production mix include: (i) a systematic decrease in overall wholesale market prices, (ii) a higher occurrence of price jumps, and (iii) a significant increase in price volatility. The goal of the present study is to test whether these changes in price behaviour have actually come…
Market efficiency and price discovery relationships between spot, futures and forward prices: the case of the Iberian Electricity Market (MIBEL)
ABSTRACTThis paper analyses the relationships between prices from three different markets within the Spanish zone of the Iberian Electricity Market (MIBEL), namely futures, spot and over the counter (OTC) forward markets. The study focuses on three items: (i) contrasting the Weak-form efficiency hypothesis of the markets involved in the study, (ii) analysing the Semi-strong-form efficient market hypothesis (EMH) of the MIBEL futures market and (iii) examining the price discovery relationships between the series of prices of the considered markets.The empirical results confirm that 1-month-, 1-quarter-, 1-year-ahead futures and spot markets satisfy, generally, the Weak-form efficiency hypoth…
Congestion management rules and trading strategies in the Spanish electricity market
Abstract This paper analyses the economic incentives embodied in the rules governing the resolution of transmission constraints in the Spanish wholesale electricity market and the way these incentives may have influenced on the trading behaviour of both the generators and the demand side. The evidence obtained is consistent with them responding to these incentives. In particular, buyers would respond to the way congestion costs are billed to them by abandoning the daily market in favour of the intraday market as far as possible. Additionally, some strategic generators may have been prompted the system operator to require them to inject electricity into the system to solve network congestion…
Price and volatility dynamics between electricity and fuel costs: Some evidence for Spain
Abstract The purpose of this study is to investigate the causal linkages between the Spanish electricity, Brent crude oil and Zeebrugge (Belgium) natural gas 1-month-ahead forward prices. Following Lutkepohl et al. (2004), we control for the presence of a structural change in the series and then we use the Johansen cointegration test and a vector error correction model (VECM) to embrace the analysis. Additionally, a multivariate generalized autoregressive conditional heteroskedastic (GARCH) model is applied to explore volatility interactions between the three markets involved in the study. Our findings reveal that Brent crude oil and Zeebrugge natural gas forward prices play a prominent rol…
Extreme value theory versus traditional GARCH approaches applied to financial data: a comparative evaluation
Although stock prices fluctuate, the variations are relatively small and are frequently assumed to be normally distributed on a large time scale. But sometimes these fluctuations can become determinant, especially when unforeseen large drops in asset prices are observed that could result in huge losses or even in market crashes. The evidence shows that these events happen far more often than would be expected under the generalised assumption of normally distributed financial returns. Thus it is crucial to model distribution tails properly so as to be able to predict the frequency and magnitude of extreme stock price returns. In this paper we follow the approach suggested by McNeil and Frey …
Optimal hedging under biased energy futures markets
Abstract Optimal futures hedging positions for those agents trying to maximize their expected utility will depend on their view about the evolution of the market and on how risk adverse they are. The most risk adverse agents will probably decide to full-cover their positions. But when a futures bias exists, hedgers with moderate or low degree of risk aversion can alter their strategy depending on the expected gains in futures markets. In our application to the UK natural gas market, we find a statistically significant time-varying negative futures bias that can be forecasted with confidence. As a result of this bias, most effective and best performing hedging strategies for moderate risk-av…