Pricing inconsistency between the futures and Financial Transmission Right markets in North America

Abstract

An empirical comparison of prices for two categories of financial derivatives of the NYISO, PJM and ISO-NE power markets, namely Financial Transmission Right (FTR) and futures contracts, is performed. The objective is to assess whether these two categories of derivatives are priced consistently, as their payoffs partially overlap. Statistical metrics reveal that implied prices for the loss component of the power price, which are obtained by combining information provided by both FTR and futures prices, are more volatile than corresponding realized loss values. This contradicts the idea of a price being a probability-weighted average of possible realized values, and therefore indicates the presence of the pricing misalignment between the FTR and futures markets of the three power markets during the period covered by the data sample.