Abstract
Forward commodity markets allow more efficient risk-sharing and information aggregation, but there is little evidence that this reduces the cost of producing the commodity. We develop a measure of the extent to which forward and spot prices agree in commodity markets with transaction costs and use it to show that day-ahead prices better reflect real-time prices at all locations in California's wholesale electricity market after the introduction of financial trading on February 1st 2011. This results in a 2.7% reduction in market-wide production costs per megawatt-hour of electricity output in high demand days relative to low demand days after 2/1/2011.
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