Estimating functional efficiency in energy futures markets

This paper proposes a method to estimate the functional efficiency of energy futures markets in terms of social welfare. Using a standard futures markets structural model, it can be concluded that the error committed when using futures prices at moment t to predict spot prices at t+1 results in welfare losses through resource misallocation. Therefore, the social welfare associated with the presence of energy futures markets can be measured using a social loss (SL) statistic and its components. This statistic is computed for six energy futures contracts with eight maturities each with data from April 1992 to December 2012. The results confirm the consistency and robustness of the method. Finally, several practical uses for the SL statistic are suggested.