Abstract

I study the extent to which investor capital flows drive asset prices in US wholesale electricity derivative markets and I provide evidence that is consistent with a pure demand shock driving prices. I exploit the 2021 North American winter storm as a shock to investor wealth and trace investor capital flows into markets that were not hit by the storm. Within these indirectly affected markets, I find that a 1% increase in investor flows increases the average derivative contract price by 0.16%. I overcome several identification challenges faced when estimating demand elasticities in equity or debt markets. I show that the derivatives’ underlying, the electricity spot market, exhibits no movements in the first or second moments. At a high level my findings provide evidence of spillovers from a climate event that result in quantitatively large demand based asset pricing effects in derivatives markets.