An empirical analysis of the bid-ask spread in the german power continuous market

Authors

Clara Balardy

Abstract

Liquidity is decisive for a well-functioning market. As most of the literature on the subject is based on financial markets, the extrapolation of its insights to the power market is fragile. This paper shows the specificities of the liquidity of the German power market. Using the bid-ask spread as a proxy, thanks to the detailed order book for the hourly contracts, I first describe the evolution of the liquidity over the trading session. The bid-ask spread has a ”L-shaped” pattern over it. Second, I identify the four main drivers of the liquidity using the bid-ask spread as a proxy: the risk, the adjustments’ need, the activity and the concentration of the market. I find that an increase of the volatility or the market concentration increases the bid-ask spread while an increase of the adjustments’ need or the market activity decreases it.