Search results for "Spot contract"
showing 10 items of 13 documents
Multivariate modeling and analysis of regional ocean freight rates
2018
Abstract In this paper, we propose a new multivariate model for the dynamics of regional ocean freight rates. We show that a cointegrated system of regional spot freight rates can be decomposed into a common non-stationary market factor and stationary regional deviations. The resulting integrated CAR process is new to the literature. By interpreting the common market factor as the global arithmetic average of the regional rates, both the market factor and the regional deviations are observable which simplifies the calibration of the model. Moreover, forward contracts on the market factor can be traded in the Forward Freight Agreement (FFA) market. We calibrate the model to historical spot r…
Pricing of forwards and other derivatives in cointegrated commodity markets
2015
Abstract We analyze cointegration in commodity markets, and propose a parametric class of pricing measures which preserves cointegration for forward prices with fixed time to maturity. We present explicit expressions for the term structure of volatility and correlation in the context of our spot price models based on continuous-time autoregressive moving average dynamics for the stationary components. The term structures have many interesting shapes, and we provide some empirical evidence from refined oil future prices at NYMEX defending our modeling idea. Motivated from these results, we present a cointegrated forward price dynamics using the Heath–Jarrow–Morton approach. In this setting, …
A critical empirical study of three electricity spot price models
2012
We conduct an empirical analysis of three recently proposed and widely used models for electricity spot price process. The first model, called the jump-diffusion model, was proposed by Cartea and Figueroa (2005), and is a one-factor mean-reversion jump-diffusion model, adjusted to incorporate the most important characteristics of electricity prices. The second model, called the threshold model, was proposed by Roncoroni (2002) and further developed by Geman and Roncoroni (2006), and is an exponential Ornstein–Uhlenbeck process driven by a Brownian motion and a state-dependent compound Poisson process. It is designed to capture both statistical and pathwise properties of electricity spot pri…
Analysis of risk premium in UK natural gas futures
2018
Abstract In many futures markets, trading is concentrated on the front contract and positions are rolled-over until the strategy horizon is attained. In this paper, a pair-wise comparison between the conventional risk premium and the accrued risk premium in rolled-over positions on the front contract is carried out for UK natural gas futures. Several novel results are obtained. Firstly, and most importantly, the accrued risk premium in rollover strategies is significatively larger than conventional risk premiums and increases with the time to delivery. Specifically, for strategy horizons between three and six months, this difference increases from 1% to 10% (or from 4% to 20% in annualized …
European Natural Gas Seasonal Effects on Futures Hedging
2015
Abstract This paper is the first to discuss the design of futures hedging strategies in European natural gas markets (NBP, TTF and Zeebrugge). A common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather, demand, and storage level seasonalities. This paper follows and extends the Ederington and Salas (2008) framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed. Our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis (futures price minus spot price). This fact remains true for short …
On the risk premium in Nordic electricity futures prices
2011
Abstract This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the market around the end of year 2002, …
Primary commodity prices: co-movements, common factors and fundamentals
2011
The behavior of commodities is critical for developing and developed countries alike. This paper contributes to the empirical evidence on the co-movement and determinants of commodity prices. Using nonstationary panel methods, the authors document a statistically significant degree of co-movement due to a common factor. Within a Factor Augmented VAR approach, real interest rate and uncertainty, as postulated by a simple asset pricing model, are both found to be negatively related to this common factor. This evidence is robust to the inclusion of demand and supply shocks, which both positively impact on co-movement of commodity prices.
An ACE Wholesale Electricity Market Framework with Bilateral Trading
2011
In this paper, an agent-based simulation model for a hybrid power market structure is presented. A bilateral transaction mechanism is combined with a uniform-pricing auction settlement in order to isolate the impact of medium-term bilateral contracts on market power and spot prices in a competitive wholesale market setting. First we describe the negotiation method for bilateral trading of energy and then introduce a new approach for bidding in the DA market based on the load duration curve. We find that, despite the conventional concerns, the foreclosure effect produced by the bilateral agreement between a generation and a retail business will not necessarily lead to higher prices, and will…
Expectations and forward risk premium in the Spanish deregulated power market
2010
Abstract Deregulation in energy markets has entailed important changes in the way agents conduct business. Price risk arises as a result of fluctuations in the future price of electricity and agents assume long or short positions in the forward and spot markets to hedge their exposure to price risk. The presence of forward risk premium in prices is evidence of the fact that agents act in the market according to risk considerations. This work aims to analyse the information content of the difference between the forward and spot prices (the so-called forward premium) regarding the agents’ decisions. We find that the sign and magnitude of the ex post forward premium depend on the unexpected va…
Short-Term Electricity Futures Prices: Evidence on the Time-Varying Risk Premium
2008
This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of…