Liquidity and risk premia in electricity futures

Increasing Liquidity (Open Interest) and Success of Maximum Bid-Offer Spreads Policy in the New Zealand Electricity Futures Market: The left-hand panel reports the increasing open interest (number of open contracts) for the two main nodes (Benmore and Otahuhu) and for all three contract forms (Front End, 1 Year and 2 Year) in the New Zealand Electricity Futures Market. This noted, most hedging occurs in the Front End contract. The right-hand panels show the bid-offer spreads for the Front-End Benmore node futures for 2011. In the graph, we define the spread as it is defined by the policy ((Bid-Offer)/Bid). The vertical dashed line is on 3 October 2011, when the maximum bid-offer spread of 5% was introduced and replaced a 10% maximum. The policy is clearly a success; it reduces spreads, bounding them to 5% rather than 10%.194