Electricity derivative markets and Samuelson hypothesis.

Summary After having been considered as a public good during decades, electricity is now regarded as a tradable commodity in most developed countries. Since they were launched twenty years ago, electricity derivative markets exhibit sustained rises in their transaction volumes. Even if these markets are still recent, there is now enough information to understand precisely how they function and to compare them with other markets for traditional commodities. Moreover, it is common to assert, in the literature on commodity derivative markets, that the behavior of futures prices is characterized by the "Samuelson Hypothesis" (Samuelson, 1965), i.e. by the presence of a decreasing pattern of volatilities along the prices curve. A deeper knowledge of the Samuelson hypothesis is required for industrial and financial agents as well as for regulatory authorities. Traditional hedgers on commodity markets are producers, industrial processors and trading companies. They use the futures markets to hedge their physical exposure to the underlying asset. Taking into account the Samuelson effect might impact the choice of their hedging horizon. Moreover, volatility is one of the most important parameters in the pricing of options. Whenever the framework of a constant volatility, as in the Black-Scholes model, is relaxed, the Samuelson effect must be taken into account. Finally, the maturity impact concerns clearing houses and regulatory authorities when setting margin requirements and thinking about risk exposures. Margin requirements, which protect against counter-party credit default risk, are function of the risk of the underlying contract, for which a proxy could be the volatility. Despite some debates about statistical measurements, this hypothesis has found a large empirical support. Yet, to the best of our knowledge, one of its empirical implications has never been proposed nor tested: if Samuelson is right, then prices shocks emerging in the physical market should propagate in the direction of the paper market. The first contribution of this paper is to fill this gap. Second contribution: up to now, the validation of the Samuelson hypothesis has never been considered in the case of electricity futures markets. Yet the non storability of this commodity raises interesting questions.