Market efficiency and risk premia in short-term forward prices

Abstract

Using recursive estimation and rolling windows over extended sample periods we examine the time-varying relationship between spot and short-term forward prices in the Pennsylvania–New Jersey–Maryland (PJM) wholesale electricity market. We examine theoretical models of forward risk premia in electricity markets and show that recent data do not provide support for existing models. The results indicate that short-term forward prices have converged towards unbiased predictors of the subsequent spot prices.