Volatility in electricity derivative markets: the Samuelson effect revisited


Edouard Jaeck, Delphine Lautier

This article proposes an empirical study of the Samuelson effect in electricity markets. Our motivations are
twofold. First, although the literature largely assesses the decreasing pattern in the volatilities along the
price curve in commodity markets, it has not extensively tested the presence of such a dynamic feature in
electricity prices. Second, the analysis of a non-storable commodity enriches the literature on the behavior
of commodity prices. Indeed, it has been sometimes asserted that the Samuelson effect results from the
presence of inventories. We examine the four most important electricity futures markets worldwide for the
period from 2008 to 2014: the German, Nordic, Australian, and US markets. We also use the American
crude oil market as a benchmark for a storable commodity negotiated on a mature futures market. Our
analysis has two steps: i) in addition to the traditional tests, we propose and test a new empirical implication
of the Samuelson effect: price shocks should spread from the physical market to the paper market, and not
the reverse; ii) based on the concept of "indirect storability", we investigate the link between the Samuelson
effect and the storability of the commodity. We find evidence of a Samuelson effect in all of the electricity
markets and show that storage is not a necessary condition for such an effect to appear. These results should
be taken into account for the understanding of the dynamic behavior of commodity prices, for the valuation
of electricity assets, and for hedging operations.
Keywords: Samuelson effect, Commodity futures, Energy derivative markets, Electricity, Volatility
spillovers, Indirect storability.