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Asymmetric Adjustments in Oil and Metals Markets

Shawkat Hammoudeh, Li-Hsueh Chen and Bassam Fattouh

Year: 2010
Volume: Volume 31
Number: Number 4
DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No4-9
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Abstract:
Using the threshold cointegration methods, Enders-Siklos (2001) and Hansen-Seo (2002), this study finds that spot and futures prices in each of the four widely traded commodities, copper, gold, WTI oil and silver are asymmet�rically co-integrated. However, the asymmetric adjustment to the long-run equi�librium differs among those commodities, reflecting different profitable opportu�nities. The adjustment is faster for copper after positive shocks, while it is faster for the safe havens oil, gold and silver after negative shocks. It is more the spot and not the futures price for the four commodities that focuses in its adjustment on long-run factors. In sum, the adjustments imply different trading strategies, depending on whether the faster adjustment happened from above or below the threshold.



Volatility Dynamics and Seasonality in Energy Prices: Implications for Crack-Spread Price Risk

Hiroaki Suenaga and Aaron Smith

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-2
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Abstract:
We examine the volatility dynamics of three major petroleum commodities traded on the NYMEX: crude oil, unleaded gasoline, and heating oil. Using the partially overlapping time-series (POTS) framework of Smith (2005), we model jointly all futures contracts with delivery dates up to a year into the future and extract information from these prices about the persistence of market shocks. The model depicts highly nonlinear volatility dynamics that are consistent with the observed seasonality in demand and storage of the three commodities. Specifically, volatility of the three commodity prices exhibits time-to-delivery effects and substantial seasonality, yet their patterns vary systematically by contract delivery month. The conditional variance and correlation across the three commodities also vary over time. High price volatility of near-delivery contracts and their low correlation with concurrently traded distant contracts imply high short-horizon price risk for an unhedged position in the calendar or crack spread. Price risk at the one-year horizon is much lower than short-horizon risk in all seasons and for all positions, but it is still substantial in magnitude for crack-spread positions. Crack-spread hedgers ignore nearby high-season price risk at their peril, but they would also be remiss to ignore the long horizon.



Blowing in the Wind: Vanishing Payoffs of a Tolling Agreement for Natural-gas-fired Generation of Electricity in Texas

Chi-Keung Woo, Ira Horowitz, Brian Horii, Ren Orans, and Jay Zarnikau

Year: 2012
Volume: Volume 33
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol33-No1-8
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Abstract:
We use a large Texas database to quantify the effect of rising wind generation on the payoffs of a tolling agreement for natural-gas-fired generation of electricity. We find that while a 20% increase in wind generation may not have a statistically-significant effect, a 40% increase can reduce the agreement's average payoff by 8% to 13%. Since natural-gas-fired generation is necessary for integrating large amounts of intermittent wind energy into an electric grid, our finding contributes to the policy debate of capacity adequacy and system reliability in a restructured electricity market that will see large-scale wind-generation development.Keywords: Wind generation, Tolling agreement, Spark spread option, Investment incentive



Physical Markets, Paper Markets and the WTI-Brent Spread

Bahattin Buyuksahin, Thomas K. Lee, James T. Moser, and Michel A. Robe

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.7
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Abstract:
We document that, starting in the Fall of 2008, the benchmark West Texas Intermediate (WTI) crude oil has periodically traded at unheard-of discounts to the corresponding Brent benchmark. We further document that this discount is not reflected in spreads between Brent and other benchmarks that are directly comparable to WTI. Drawing on extant models linking oil inventory conditions to the futures term structure, we test empirically several conjectures about how calendar and commodity spreads (nearby vs. first-deferred WTI; nearby Brent vs. WTI) should move over time and be related to storage conditions at Cushing. We then investigate whether, after controlling for macroeconomic and physical market fundamentals, spread behavior is partly predicted by the aggregate oil futures positions of commodity index traders.



International Oil Market Risk Anticipations and the Cushing Bottleneck: Option-implied Evidence

Marie-Hélène Gagnon and Gabriel J. Power

Year: 2020
Volume: Volume 41
Number: Number 6
DOI: 10.5547/01956574.41.6.mgag
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Abstract:
This paper studies crude oil market integration and spillovers between Brent and WTI oil indexes over the 2006�2019 period. In addition to prices, we estimate time series of model-free option-implied moments to capture forward-looking market views and anticipations of different risk categories. We describe the WTI-Brent equilibrium relationship in prices and in risk expectations measured by implied volatility, skewness, and kurtosis. Using a fractional cointegration model, we find long memory in the price cointegrating vector and in implied moments, implying that persistence of shocks is an important feature of crude oil markets. The evidence supports a differential in implied volatility but not in prices, and suggests equilibrium fragmentation during the Cushing bottleneck period. Analysis of implied moments reveals that Brent and WTI risk anticipations generally share a common equilibrium. Unlike volatility, asymmetric and tail risks are more locally driven, especially during market disruptions such as the Cushing bottleneck, so there is potential for diversifying extreme risks using both indexes.



Modelling the Global Price of Oil: Is there any Role for the Oil Futures-spot Spread?

Daniele Valenti

Year: 2022
Volume: Volume 43
Number: Number 2
DOI: 10.5547/01956574.43.2.dval
View Abstract

Abstract:
This paper illustrates the main benefits of accounting for the oil futures-spot spread in a Structural Vector Autoregressive model of the international market for crude oil. To this end, we replace the proxy for global above-ground crude oil inventories with the spread, which is derived by Brent crude futures prices with maturity 3-months. This model can be motivated on the basis of several economic considerations. First, the spread exploits the price discovery role in the crude oil futures markets. Second, the spread-based model alongside a proper set of identifying assumptions accounts for the presence of informational frictions and it allows for the feedback effect from futures to spot markets. Finally, the inventory proxy is affected by measurement error. The dynamic response functions show a positive relationship between the spread and the real price of oil, triggered by speculative shocks to financial markets. Moreover, this study provides a clear picture of the historical dynamic of the real price of oil and the spread during some of the exogenous events in the oil markets.



An Empirical Analysis of the Bid-ask Spread in the Continuous Intraday Trading of the German Power Market

Clara Balardy

Year: 2022
Volume: Volume 43
Number: Number 3
DOI: 10.5547/01956574.43.3.cbal
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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 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 bid-ask spread: the volatility, the adjustments' need (forecast errors), 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.





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