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Developing Futures Markets for Electricity in Europe

Eirik Schroder Amundsen and Balbir Singh

Year: 1992
Volume: Volume 13
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No3-5
View Abstract

Abstract:
Risk sharing instruments, which allow consumers and producers to hedge their price-risk, are additional essential elements of the electricity reorganization process presently taking place in Europe. This paper involves tin analysis of the feasibility of establishing futures markets in the electricity sector in general and with special emphasis on steps undertaken in the United Kingdom and Norway. Even though there seems to be sufficient price uncertainty to warrant the development of futures markets, there remains the question of whether the underlying new spot-markets are yet sufficiently competitive and well-functioning. Monopolistic elements in electricity generation make it doubtful whether efficiency can be obtained through the intended (Bertrand) price competition in the spot-market. Additional problems may arise from the potential adverse response of dominant multi-objective public enterprises to the new futures markets.



An Econometric Analysis of the Market for Natural Gas Futures

W. David Walls

Year: 1995
Volume: Volume16
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No1-5
View Abstract

Abstract:
This research tests a form of the efficient markets hypothesis in the, market for natural gas futures. Unlike other studies of futures markets, the test for market efficiency is conducted at numerous locations which comprise the, natural gas spot market in addition to the delivery location specified in the futures contract. Natural gas spot and futures prices are found to be nonstationary and accordingly are modeled using recently developed maximum likelihood cointegration techniques. The futures market price is found to be cointegrated with nearly all of the spot market prices across the national network of gas pipelines. The hypothesis of market efficiency can be rejected in 3 of the 13 spot markets examined.



The Dynamics of Commodity Spot and Futures Markets: A Primer

Robert S. Pindyck

Year: 2001
Volume: Volume22
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-1
No Abstract



Secondary Market and Futures Market for the Provision of Gas Pipeline Transportation Capacity

Ricardo B. Raineri and Andres T. Kuflik

Year: 2003
Volume: Volume 24
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol24-No1-2
View Abstract

Abstract:
The natural gas pipeline transportation industry has a long history of regulatory interventions limiting the market power of the pipeline owner. Most studies, however, focus on the static efficiency of the corresponding contract structures. For more realistic results, we consider transportation capacity as a durable good and analyze the dynamic efficiency of structures such as leasing and the selling of tradable rights with or without secondary markets and futures markets. Compared to a lease contract structure where the pipeline owner controls the transportation capacity at all periods the selling of tradable rights with a competitive secondary market dissipates the monopolist's market power and leads to higher social welfare. However, the monopolist's articipation in the futures market can reduce welfare by providing him with a credible way to restrain production in future periods, thus restoring the market power he enjoyed in a lease situation.



Do Speculators Drive Crude Oil Futures Prices?

Bahattin Buyuksahin and Jeffrey H. Harris

Year: 2011
Volume: Volume 32
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-7
View Abstract

Abstract:
The coincident rise in crude oil prices and increased number of financial participants in the crude oil futures market from 2000-2008 has led to allegations that "speculators" drive crude oil prices. As crude oil futures peaked at $147/ bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes; the results instead suggest that price changes precede their position changes.



Optimal Abandonment of EU Coal-fired Stations

Luis M. Abadie, José; M. Chamorro and Mikel González-Eguino

Year: 2011
Volume: Volume 32
Number: Number 3
DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No3-7
View Abstract

Abstract:
Coal-fired power plants face potential difficulties in a carbon constrained world. The traditional advantage of coal as a cheaper fuel may erode in the future if CO2 allowance prices increase. When would it be optimal to abandon a coal station and obtain its salvage value? We assess this question following the Real Options approach. We consider the case of a coal plant that operates in a deregulated electricity market where natural gas-fired plants are the marginal units. We assume specific stochastic processes for the fundamental uncertainties in our model: coal price, natural gas price, and emission allowance price. The underlying parameters are derived from actual futures markets. They are further used in a three-dimensional binomial lattice to assess the decision to abandon. We draw the optimal exercise boundary. Sensitivity analyses (regarding fuel prices, allowance price, volatilities, useful life, residual value, thermal efficiency, safety valves in carbon prices, time step) are also undertaken.



The Role of Speculation in Oil Markets: What Have We Learned So Far?

Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.2
View Abstract

Abstract:
A popular view is that the surge in the real price of oil during 2003-08 cannot be explained by economic fundamentals, but was caused by the increased financialization of oil futures markets, which in turn allowed speculation to become a major determinant of the spot price of oil. This interpretation has been driving policy efforts to tighten the regulation of oil derivatives markets. This survey reviews the evidence supporting this view. We identify six strands in the literature and discuss to what extent each sheds light on the role of speculation. We find that the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialization of oil futures markets.



The Role of Financial Speculation in Driving the Price of Crude Oil

Ron Alquist and Olivier Gervais

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.3
View Abstract

Abstract:
As financial firms have increased their positions in the oil futures market during the past ten years, oil prices have increased dramatically as well. The coincidence of these two events has led some observers to argue that financial speculation caused the oil-price increases. Yet several arguments cast doubt on the validity of this claim. For example, although the quantity of oil implied by the number of open futures contracts is much larger than U.S. daily oil consumption, comparing these two statistics is misleading because not all paper oil is immediately deliverable. In addition, changes in financial firms� positions do not predict oil-price changes, but oil-price changes predict changes in positions. Other explanations for the oil-price increases include macroeconomic fundamentals such as increased demand from emerging Asia. Of these explanations, the most consistent with the facts relates the oil-price increases to a series of positive demand shocks emanating from emerging Asia.



Financial Speculation in Energy and Agriculture Futures Markets: A Multivariate GARCH Approach

Matteo Manera, Marcella Nicolini, and Ilaria Vignati

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.4
View Abstract

Abstract:
This paper analyses futures prices of four energy commodities (crude oil, heating oil, gasoline and natural gas) and five agricultural commodities (corn, oats, soybean oil, soybeans and wheat), over the period 1986�2010. Using DCC multivariate GARCH models, it provides new evidence on four research questions: 1) Are macroeconomic factors relevant in explaining returns of energy and nonenergy commodities? 2) Is financial speculation significantly related to returns in futures markets? 3) Are there significant relationships among returns, either in their mean or variance, across different markets? 4) Is speculation in one market affecting returns in other markets? Results suggest that the S&P 500 index and the exchange rate significantly affect returns. Financial speculation, proxied by Working�s T index, is poorly significant in modelling returns of commodities. Moreover, spillovers between commodities are present and the conditional correlations among energy and agricultural commodities display a spike around 2008.



Measuring Index Investment in Commodity Futures Markets

Dwight R. Sanders and Scott H. Irwin

Year: 2013
Volume: Volume 34
Number: Number 3
DOI: 10.5547/01956574.34.3.6
View Abstract

Abstract:
The "Masters Hypothesis" is the claim that unprecedented buying pressure in recent years from new index investment created a massive bubble in commodity futures prices. Due to data limitations, some recent studies of the market impact of index investment in the WTI crude oil futures market impute index positions. We investigate the accuracy of the algorithm popularized by Masters (2008) to estimate index positions. The estimates generated by the Masters algorithm deviate substantially from the positions reported in the U.S. Commodity Futures Trading Commission's (CFTC) Index Investment Data (IID) report--the agency's best data on index positions. The Masters algorithm over-estimates the gross WTI crude oil position by an average of 142,000 contracts. Importantly, the deviation in the first half of 2008, the period of greatest concern about the market impact of index investment, is directionally wrong. These results suggest empirical tests of market impact based on mapping algorithms in WTI crude oil futures should be viewed with considerable caution.




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