Time-zero Efficiency of European Power Derivatives Markets

TL;DR

This paper evaluates the time-zero efficiency of European electricity derivatives markets by applying statistical tests and trading rules to daily data from Germany, France, and Spain, highlighting liquidity challenges affecting market efficiency assessments.

Contribution

It introduces a comprehensive approach combining statistical tests and trading rules to assess time-zero efficiency in electricity derivatives markets across multiple European countries.

Findings

German market results are consistent with efficiency after considering transaction costs.

French and Spanish markets face liquidity issues that hinder definitive efficiency conclusions.

Recommendations include improving liquidity through incentives and increased transparency.

Abstract

We study time-zero efficiency of electricity derivatives markets. By time-zero efficiency is meant a sequence of prices of derivatives contracts having the same underlying asset but different times to maturity which implies that prices comply with a set of efficiency conditions that prevent profitable time-zero arbitrage opportunities. We investigate whether statistical tests, based on the law of one price, and trading rules, based on price differentials and no-arbitrage violations, are useful for assessing time-zero efficiency. We apply tests and trading rules to daily data of three European power markets: Germany, France and Spain. In the case of the German market, after considering liquidity availability and transaction costs, results are not inconsistent with time-zero efficiency. However, in the case of the French and Spanish markets, limitations in liquidity and representativeness are challenges that prevent definite conclusions. Liquidity in French and Spanish markets should improve by using pricing and marketing incentives. These incentives should attract more participants into the electricity derivatives exchanges and should encourage them to settle OTC trades in clearinghouses. Publication of statistics on prices, volumes and open interest per type of participant should be promoted.