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Measuring and Assessing the Evolution of Liquidity in Forward Natural Gas Markets: The Case of the UK National Balancing Point

Lilian M. de Menezes, Marianna Russo, and Giovanni Urga

Year: 2019
Volume: Volume 40
Number: Number 1
DOI: 10.5547/01956574.40.1.lmen
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Abstract:
Following the development of natural gas trading hubs in Europe, forward products have become a response to the higher exposure to price risk faced by energy companies. Yet, a significant share of trade occurs over-the-counter (OTC), where inter-dealer brokers act as intermediaries and deals may be customized. Hence, there are concerns about transparency and market quality, of which liquidity is a main indicator. This study investigates liquidity in the largest one-month-ahead European forward market for natural gas in the period from May 2010 to December 2014, using asynchronous high-frequency data and time-varying measures of spread and price impact from the financial market microstructure literature. The usefulness of these measures in the seasonal and evolving National Balancing Point (NBP) is assessed. Different aspects of liquidity and transaction costs are unveiled.



The (time-varying) Importance of Oil Prices to U.S. Stock Returns: A Tale of Two Beauty-Contests

David C. Broadstock and George Filis

Year: 2020
Volume: Volume 41
Number: Number 6
DOI: 10.5547/01956574.41.6.dbro
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Abstract:
We evaluate the probability that oil prices affect excess stock returns for U.S. listed firms. The probabilities are obtained from a time-varying multi-factor asset pricing framework estimated using dynamic model averaging techniques, including oil price information among several other possible risk factors. Two widely used oil price measures are considered, one based on raw oil price changes and another based on disentangling the source of oil price changes due to supply-side or demand-side effects. As far as we know our dataset, which comprises 10,118 stock price series with up to 25,372,588 observations between 1995�2018, is the most comprehensive used for this purpose. We develop two �beauty-contests� in which we estimate the multi-factor models separately for individual stocks, for each of the two oil price measures. The results suggests that, when working with daily data (beauty contest 1), oil price changes are a significant (important) determinant for around 1�3% of the sample. When using oil price shocks�as opposed to oil price changes�(beauty contest 2) this percentage increases to 27�45%, suggesting that oil supply and demand shocks (as opposed to oil price changes) can better explain firm-level excess returns, at least for monthly frequency data where such a decomposition is available. We provide evidence that the increase in percentage is only partially attributable to data-frequency, and more likely attributed to the decomposition into supply/demand driven oil price changes. We reconcile differences between our findings and those reported in previous literature on the basis of the fully dynamic nature of our adopted methodology.



Comparing the Risk Spillover from Oil and Gas to Investment Grade and High-yield Bonds through Optimal Copulas

Md Lutfur Rahman, Syed Jawad Hussain Shahzad, Gazi Salah Uddin, and Anupam Dutta

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.mrah
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Abstract:
This paper compares the tail dependence and risk spillovers from the oil and gas to high-yield (HY) and investment grade (IG) bond markets. We use time-varying optimal copula framework to examine the dependence and further quantify upside and downside risk spillovers. We also explore how energy futures can be used to hedge risk of HY and IG bond portfolios. Our results show that the bond returns are more sensitive to risk shocks in the oil market compared to gas market. We find both negative and positive tail dependence between the bond and energy pairs and the relationship is stronger during the oil-crunch period. The dependence however is asymmetric across the tails. Finally, compared to oil futures, gas futures are found to be better hedge for the bond investment. These results can help in managing portfolio risk and designing optimal asset allocation strategies. These might also assist in formulating policies and regulations to manage the effects of cross-market risk transmissions.



News Media and Attention Spillover across Energy Markets: A Powerful Predictor of Crude Oil Futures Prices

Oguzhan Cepni, Duc Khuong Nguyen, and Ahmet Sensoy

Year: 2022
Volume: Volume 43
Number: Special Issue
DOI: 10.5547/01956574.43.SI1.ocep
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Abstract:
We develop two news-based investor attention measures from the news trends function of the Bloomberg terminal and investigate their predictive power for returns on crude oil futures contracts with various maturities. Our main results after controlling for relevant macroeconomic variables show that the Oil-based Institutional Attention Index is useful in predicting oil futures returns, especially during price downturn periods, while the forecasting accuracy is further improved when the Commodity Market Institutional Attention Index is used. This forecasting accuracy decreases, however, with the maturity of oil futures contracts. Moreover, we find some evidence of Granger-causality and regime-dependent interactions between investor attention measures and oil futures returns. Finally, variable selection algorithms matter before making predictions since they create the best forecasting results in many cases considered. These findings are important for informed traders and policymakers to better understand the price dynamics of the oil markets.





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