The Efficient Market Hypothesis and Electricity Market Efficiency Test

Market efficiency is one of the primary design objectives of an electricity market as well as for other commodity markets. The efficient market hypothesis (EMH) has been applied to many other markets. However, there are very little research has been done on electricity market efficiency testing. In this paper, we analyse the characteristics of an electricity market, comparing with other markets, and propose a testing approach for electricity market efficiency assessment. The primary measurement of market efficiency is done by calculating correlation between fuel prices and electricity market prices as in our proposed testing approach. The proposed method provides a very useful tool for electricity market design, operation and management, targeting at better market efficiency. Real market data from the national electricity market of Australia is used in this paper as case studies to illustrate the usefulness of the proposed method