ABSTRACT. We identify the impact of financialization on commodity futures market liquidity and pricing efficiency, based on intraday price and trade data. First, we exploit the NYMEX’s introduction of electronic trading as an instrument to identify the causal effect of institutional trading on market quality. Using a comprehensive dataset of individual trader activity in NYMEX crude oil futures from March 2006 through February 2007, we document a sharp increase in trading by financial institutions following the advent of e-trading in September 2006. We apply a two-stage regression analysis to show that, except for depth, various proxies of market quality improved due to this financialization. Second, having established causality, we apply a structural VAR analysis to further examine the endogenous relationship between participation of financial institutions and market quality. Using data from March 2007 to March 2009, we document that large increases in institutional participation contemporaneously narrow realized bid-ask spreads, cut customer order imbalance and reduce pricing error volatility – but also worsen market depth.

ABSTRACT. We investigate the hedging versus the financialization nature of commodities vis-à-vis equities. With the exception of gold, the majority of commodity futures can be treated as a separate asset class in line with their financialization. This finding is robust to the presence of inflation, highlight the hedging role of energy commodities in the nineties and reveal that commodity financialization boosted since the 2000s. We only uncover the safe-haven characteristic of gold in the short-term.

ABSTRACT. Building on the theory of comovement proposed by Barberis et al.(2005), we investigate drivers of the observed increase in comovement prices of commodity futures and provide new empirical evidences. We examine differences in the dependence structure between commodities. Index non-energy commodities exhibit an increase in comovement whereas those commodities off the index do not. We interpret this to be additional evidence of financialization as the driver of the observed increase in comovement.

ABSTRACT. Existing literature reveals a close link between frozen concentrated orange juice (FCOJ) futures prices and fundamental factors underlying the market, e.g. freezing temperatures, and changing production and storage estimates. We first analyze available data, building on econometric studies for this market. We then propose a simple structural model that captures the effect of key fundamental drivers on the orange juice supply and thus reproduces some important features of FCOJ price dynamics.

ABSTRACT. In April 2012, Delta Airlines announced it would purchase the mothballed Trainer oil refinery in eastern Pennsylvania in order to secure access to a local supply of jet fuel—and more broadly to incorporate the refinery’s output into Delta’s fuel hedging and risk management strategy. This unique vertical integration experiment was widely derided at the time, but we assess whether the policy has been value-enhancing over the four years since, and conclude it generally has been so. The purchase announcement generated positive abnormal returns, and the default risk for Delta’s bonds, proxied by CDS spread, dropped significantly at the purchase announcement and has continued trending down since then. After an unprofitable start-up period, Trainer has contributed significantly to Delta’s operating profits and reduced its stock price exposure (stock price sensitivity, SPS) to crude oil and jet fuel price movements. Given the very small price Delta paid for the Trainer refinery--$150 million plus $270 million in subsequent capital investment—and the fact that the benefits detailed above have accrued to Delta in both high and low oil-price regimes, we conclude this policy has proven beneficial.

ABSTRACT. Iran’s energy and petrochemicals exports have recently been restricted by a series of multilateral and unilateral sanctions. This paper focuses on one of the country’s exports, namely methanol – a petrochemical commodity actively traded in various locations worldwide – and empirically explores the relationships among the North American, European and Asian markets to investigate the incidence of these sanctions on the degree of spatial integration. The analyses are conducted under a parity bounds framework based on Negassa and Myers (2007). The model was applied to the main methanol importing markets to estimate the effects of the sanctions on spatial market efficiency. The findings document the occurrence of a complete reconfiguration of the spatial extent of the methanol markets. Under the sanctions, an increased degree of market integration was observed across the Atlantic, while fragmentation rose between Europe, South East Asia and the two giant economies of China and India that both experienced lower prices.

ABSTRACT. This paper models the conditional realized volatility of CO2 futures, which are traded under the EU emission trading scheme (EU-ETS). The conditional distribution is an important tool for traders and forecasting. The analysis is based on 5 year of intraday data (May 2007-April 2012) for futures on CO2 certificates for the sec- ond EU-ETS trading period (expiry December 2008-2012). Besides stylized facts commonly observed in financial time series, we observe long-memory properties in the realized volatility series. The standard ARFIMA model for long-memory lacks a compelling interpretation. Therefore, we use the HAR-RV model (Corsi, 2009), which reproduces the long-memory properties in the time-series, but has a simpler interpretation. We compare the performance of this model for model fit, in-sample and out-of-sample performance with the ARFIMA model and other AR models. The results confirm the better model fit and forecasting performance of the HAR- RV model. The model allows to explain the volatility drivers and structure in the market, according to the Heterogeneous Market Hypothesis.

ABSTRACT. A multivariate constrained robust M-regression method is developed to estimate the shaping coefficients for energy forward prices. A practical algorithm is included. All shaping coefficients can be treated simultaneously and model arbitrage can be ruled out at a very elementary level. Moreover, by using robust M-regression, the provided results are stable and not sensitive to isolated sparks or dips in the market. The method is applied to German electricity prices.

ABSTRACT. In this paper we evaluate the information content of four different asset classes’ volatilities when forecasting the oil price realized volatility. Our out-of-sample forecasting results reveal that: (i) the use of exogenous volatilities statistically significant improves the forecasting accuracy at all forecasting horizons, (ii) the forecasting models are highly accurate in predicting future movements of oil price volatility, (iii) the findings are robust even during turbulent economic periods.

ABSTRACT. We propose an integrated framework for CCR. The model is based on a structural approach which uses correlated Lévy processes. The framework is sufficiently flexible in incorporating mitigating clauses such as netting and collateral. A Case Study of a Commodity Swap involving an energy sector company, a sector hit from the wave of downgrades following the plunge in oil prices, is discussed. The drop in prices has also been beneficial for industries consuming petroleum products, such as airlines.

ABSTRACT. In this paper we assess the real option value of operating reserve provided by an electricity storage unit. The contractual arrangement is a series of American call options in an energy imbalance market (EIM), physically covered and delivered by the store. The EIM price is a general regular one-dimensional diffusion. Necessary and sufficient conditions are provided for a unique optimal strategy and value. We provide a straightforward procedure for numerical solution and several examples.

ABSTRACT. Risk premia play a key role in commodity markets. However, these risk premia are not observed in the markets and its estimation is arduous, especially if the considered models have not a closed-form solution. These premia can be obtained by means of the risk-neutral stochastic processes of the model, but there are not observations in the market. Recently, some authors have proposed a new approach for estimating these risk-neutral processes directly from market data. Moreover, they have showed its application to a model when the jump follows a Normal distribution. In this paper, we examine the accuracy of this method with NYMEX (New York Mercantile Exchange) data and we show the benefits of using an Exponential distribution instead of a Normal distribution when pricing natural gas futures and options. Finally, we analyze the behaviour of the futures risk premium in the natural gas market.

ABSTRACT. A Review of the Literature on Commodity Risk Management

ABSTRACT. This paper study commodity spot and futures price under a continuous-time setting. Our model considers a firm, which use an input commodity to produce an output commodity, stores commodity, and trade futures commodity to hedge. Through dynamic programming and Hamilton-Jacobi-Bellman equation, we derive relations between spot price and futures price. The optimal production plan and trading strategy for spot commodity and futures are also derived.

ABSTRACT. Corporate portfolios often show joint exposure to both tradable and non-tradable revenue and cost related components on a varying extent. Given a financial endowment put forward by a firm for risk mitigation purposes, we design the best pair of tailor-made derivatives they may buy using that endowment in order to optimally mitigate the combined effect of tradable and non-tradable risk terms. One hedging instrument pays off a non-linear function of the tradable component of firm exposure, which may identified as a market price or index; the other product is a non-linear contingent claim written on any other quoted price or index exhibiting statistical dependence to the underlying non-tradable term via an arbitrary copula functions with assigned density. We derive closed-form expressions for the optimal hedging pair under minimal assumptions about the underlying model setting. In general, any solution satisfies a 2-dimensional Fredholm system of equations, whose solution is derived using the method of sequential approximation. Exponential convergence is proved in all possible non-degenerate cases.

ABSTRACT. Daily electricity prices are characterised by strong autoregressive persistence, day-of-the week effects, seasonal effects, large spikes or jumps, fast mean-reversal and ARCH. Many models and approaches have been proposed to handle each of these effects separately. However, none handle all of these jointly in a computationally feasible manner. We propose a modelling procedure that does just that. The procedure leads to a parsimonious model of the conditional mean and volatility, where the latter is robust to spikes or jumps. The importance of robustness to spikes is illustrated by a comparison with other volatility models, whereas rich dynamics and computational simplicity is illustrated by automated model selection of a starting model that accommodates numerous periodicity effects in the volatility. Finally, a similar exercise is undertaken for a multivariate model of the relationship between peak and off-peak spot daily electricity prices with time-varying correlations.

ABSTRACT. We study the utility maximization problem of the terminal wealth of an agent operating in the intra-day power market. Assuming that the price of traded hours follow additive mean-reverting processes, we derive the optimal strategy via the Hamilton-Jacobi-Bellman equation. We implement an ad-hoc estimation procedure for unevenly spaced time series, based on maximum likelihood and a bootstrap bias correction. Finally, we backtest our method and conclude.

ABSTRACT. In this study, we aim at understanding the dynamics of the risk premium and the noise in futures prices for electricity. We firstly extract the information from smoothed price forward curves. The main innovation of our approach is that we aim at understanding the dynamics of risk premia and noise bi-dimensionally: in time, for one specific maturity, but also cross-section looking at the correlations in the noise between different points on the price forward curve.

ABSTRACT. We hand-collect time-series data on positive and negative oil price news from 100 news sources from around the world, covering 59,129 news articles on the oil market. Using time-series predictive regression models estimated for 45 countries, we show that: (a) positive and negative news predict stock returns for 12 countries for which the oil price does not predict returns; and (b) together the three oil price measures predict returns for 22/45 countries.

ABSTRACT. This paper investigates the effect of oil price uncertainty on the U.S. business cycle using a VAR GARCH-in-mean model. We control for the influence of global supply and demand factors. We find that oil price uncertainty still has a highly significant negative influence. The effect is economically important, mostly after a significant variance shift in the mid-1980s. Significant spillover effects in the GARCH model suggest that oil price volatility is a gauge of general macroeconomic uncertainty

ABSTRACT. We develop a new oil price uncertainty index (OPUX) based on newspaper and social networking coverage. Our index improves on the existing oil ETF volatility index (OVX). Several pieces of evidence, including a media audit of 14,233 newspaper articles and 502 tweets, indicate that our OPUX predicts changes in the uncertainty of oil prices. Specifically, our results demonstrate that the OPUX improves ability to predict oil price volatility between 24% and 30%.

ABSTRACT. In this paper we study the modeling and computational benefits of using Lévy processes and the Fast Fourier Transform (FFT) in the valuation of gas storage assets and, from a practitioners perspective, in creating market consistent valuations and hedging portfolios. The valuation methodology derives the asset value via stochastic backwards dynamic programming using the methodology of [lord2007fast] and [jaimungal2011levy]. Further, we go on to present a modification to this algorithm which removes the need for a dampening parameter and leads to an increase in valuation convergence. The use of the FFT algorithm opens up a wide range of potential spot price models. We present the characteristic function of one such model, the mean reverting Variance-Gamma process. We provide a rationale for using this model in fitting the implied volatility smile by comparing the process moments with the more common mean reverting diffusion model. We next present the dynamics of the implied spot price under a general single factor Lévy driven forward curve model and, using these results, we go on to present the forward curve consistent conditional characteristic function of the implied spot price model. We derive a transform based swaption formula in order to calibrate our models to market traded options, and use these calibrated models to then value a stylized storage asset and calculate the hedging positions needed to monetize this value. We demonstrate how one can perform informative scenario based analysis on the relationship between the implied volatility surface and the asset value. Finally, convergence results for the valuation algorithm are presented, along with a discussion around the potential for increasing further the computational efficiency of the algorithm.

ABSTRACT. The VT-DCC is introduced to investigate the spillover effect of stock market panic on crude oil and natural gas markets conditional on volatility regimes. The model allows the dynamics of correlations to depend on asset variances through a threshold structure. The empirical study of our model to a sample of US stock market panic, represented by the VIX indicates that the periods of stock market investors' panic are significantly associated with an increase in cross-market co-movement.

ABSTRACT. We present a joint calibration-estimation risk measurement methodology, providing a distributional assessment of parameter risk. We consider natural gas storage valuation, using a multifactor Mean Reverting Variance Gamma model. We devise an accessible model selection technique. For a basic storage contract, we show that the parameter risk of our two-factor model is higher relative to single-factor benchmarks. This increased uncertainty is shown to be bearable though.

ABSTRACT. We study the effects of financial investments on commodity futures returns, using structural vector autoregressions identified through heteroskedasticity. We find that demand shocks of both index investors and hedge funds impact positively on returns. These shocks are a relevant driver of commodity returns, especially during periods of high speculative demand volatility. Hedge funds, however, also absorb demand shifts of other traders, such as commodity producers and index investors. Overall, our results confirm that position changes initiated by speculators have significant price effects. Moreover, the findings reveal an important difference between financial traders: while index investors are mainly consumers of liquidity, hedge funds are both consumers and providers of liquidity.

ABSTRACT. We analyze whether trading activity of different trader types impacts the contribution of the futures market to the price discovery process and the rate of convergence between spot and futures markets. There is strong evidence that speculators (commodity index traders) increase (reduce) the rate of convergence between spot and futures markets. There is only scarce evidence that trading activity of any trader category affects the contribution of the futures market to price discovery.

ABSTRACT. We examine the Dated Brent benchmark published by Platts. We find anticipatory trading in oil futures market during the physical price fixing period. We report enhanced levels of trading volume, trade size and volatility in Brent futures. Results suggest information leaks from the fixing window to the futures market, enabling significant abnormal returns of 27 bps. Our findings inform policy makers on the influence of unregulated price benchmarks on exchange-traded financial derivatives.

ABSTRACT. The term 'financialization' describes the phenomenon that commodity contracts are traded for financial reasons and not for fundamental motives. We study the effect of financial speculation on commodity prices in a heterogeneous agent production economy with an agricultural and an industrial producer, a financial speculator, and a commodity consumer. While access to financial markets is beneficial for the participating agents, it matters w.r.t. overall welfare effects who can trade with whom.

ABSTRACT. This paper investigates dynamic correlations both across commodities and between commodities and traditional assets using the Regime Switching Dynamic Correlation (RSDC) model. We suggest that the low correlation between In-index commodities and equities and bonds detected before the financial crisis should not be interpreted as a weak integration between commodity and financial markets. Integration was actually high, as revealed by the financial crisis, but was masked by the “style”effect.

ABSTRACT. We introduce a futures-based multi-factor stochastic volatility model. We calculate the joint characteristic function of two futures contracts and use it to price calendar spread options. In an empirical application we perform a joint calibration to market prices of vanilla and calendar spread options on WTI. We provide evidence that the model matches implied volatilities and fits prices of calendar spread options. In particular, we observe a phenomenon we call the Samuelson correlation effect.

ABSTRACT. The aims of this paper are twofold. Firstly, we present an approximating formula for pricing basket and multi-asset spread options, which genuinely extends Caldana and Fusai (2013) two-asset spread options formula. Secondly, under the lognormal setting, we show that our formula becomes a Black and Scholes type formula, extending Bjerksund and Stensland (2011). Numerical experiments and comparison with Monte Carlo simulations and other methods available in the literature are discussed. The main contribution of this paper is to provide practitioners with a pricing formula, which can be used for pricing basket and multi-asset spread options, even under a non-Gaussian framework.

ABSTRACT. Thermal assets may be modeled as a strip of spread options, whose market value is often computed with the widely used Kirk-Margrabe approximation. In this paper, we measure its accuracy as regards Monte-Carlo simulations, compare it to other closed forms, and try to establish links between this accuracy and the market environment. The results obtained lead us to recommend to rather use, when possible, Monte-Carlo simulations to price and hedge thermal assets.

ABSTRACT. The diamond market has recently experienced important structural changes moving from a monopolistic market to a competitive one. Diamonds have become a new potential investment class, which could represent a valuable portfolio component. The paper introduces the market of standard polished diamonds by building a standardized diamond financial index, which may be traded and represents a new investment opportunity. A standardized diamond basket index, IGSDBI is built by using a unique diamond price dataset based on actual diamond transactions. The main features of the tradable diamond index are analyzed to verify if diamonds can be considered a zero beta asset providing an effective diversification instrument for investment strategies. We study the dynamics of the diamond basket index and analyze its relationship with macroeconomic variables as well as financial variables.

ABSTRACT. This paper uses the recent technology developed by Phillips, Shi and Yu (2015, International Economic Review) to test for bubble behavior in WTI crude oil front month futures prices over the last decade. Our sample encompasses both the pre-crisis period, in which there was a substantial run-up in crude oil prices, and the recent period in which prices have fallen significantly. Results using the raw series suggest there were two bubbles, a positive bubble in 2008 and a negative bubble from November 2014 to January 2015. The PSY test, however, makes the assumption of constant volatility across regimes. Here, to adjust for this, we apply the test to the raw series deflated by CBOE crude oil VIX volatility, and show there no evidence to support bubble behavior in the deflated series. Our results suggest that when we account for forward looking option market volatility, there is no evidence to suggest there were bubbles in crude oil contrary to popular belief.

ABSTRACT. The paper investigates the role of gold, crude oil and bonds as a hedge and a safe haven for stock and currency market. The analysis is carried out in two stages. During the first one we identify flights to safety moments and distinguish two different market regimes. During the second stage we analyse the relation between the variables using the rolling regression. We find that only some relations are stable. Although gold and crude oil are positively correlated do not play the same role.

ABSTRACT. This article investigates the joint behaviour of vessel prices, earnings, and trading activity in the dry bulk shipping industry. We develop and estimate a behavioural asset-pricing model with microeconomic foundations that can account for some distinct characteristics of the market. Namely, our partial equilibrium model reproduces the actual volatility of vessel prices, the average trading activity in the market and the positive correlation between earnings and second-hand transactions.

ABSTRACT. We introduce a three-regime Bayesian Markov-Switching vector autoregressive model which captures short-term transmission of shocks to the shipping market. The results indicate that financial proxies behave as channels which spread risk before and during the financial meltdown. Higher risk premium required by investors for holding financial assets depresses substantially the shipping market. We document that shipowners embarked upon a building boom fuelled by easy credit.

ABSTRACT. We study the performance of asymmetric regime-switching GARCH models to forecast the volatility of tanker freight rates. In contrast to other studies, we examine seasonally adjusted data. We find that asymmetric regime-switching models outperform their single-regime and symmetric complements in terms of in-sample fit and out-of-sample forecasting accuracy. However, accounting for volatility regimes and asymmetry does not produce better forecasts of Value-at-Risk and Expected Shortfall.

ABSTRACT. We investigate the impacts of the Australian Carbon Tax Policy on electricity prices. Using electricity futures contracts, we derive an implied 'carbon premium' from observed futures quotes and compare this to the actual expected additional costs that are based on emission intensities in the individual states. We also investigate how expectations about the introduction or repeal of the tax impacted on electricity futures prices.

ABSTRACT. We examine high frequency information assimilation at scheduled announcements in the European carbon futures market. We find that verified emissions, U.S. non-farm payroll and German new factory order announcements have the greatest impact on prices and illiquidity; a wait-and-see trading behavior is evident in realized volatility and trading volume. Over time, news is assimilated more in returns and there is more post-announcement realized volatility.

ABSTRACT. The paper explains how stock price of oil companies depends on oil futures market price. The model is applied to major oil company stocks: Shell, Exxon Mobil, BP, Total and Chevron. The topic is original because it focuses on short- and long-term relationships with vector error correction models (VECM) with changing regimes.

To get structural model between stock price of oil companies and oil futures market price, investigation is oriented to cointegration link with autoregressive vector (VAR). Research is conducted in using monthly data from November 1989 to June 2011. The stationarity of times series is tested with Dickey-Fuller unit root test, Philips-Perron and KPSS. The approaches of Engle-Granger and Johansen do not enable to find long-term relationship over the overall period.

To get structural model between stock price of oil companies and oil futures market price, investigation is oriented to cointegration link with autoregressive vector (VAR). Research is conducted in using monthly data from November 1989 to June 2011. The stationarity of times series is tested with Dickey-Fuller unit root test, Philips-Perron and KPSS. The approaches of Engle-Granger and Johansen do not enable to find long-term relationship over the overall period.

However, cointegration with 5 changing regimes is found. The Bai and Perron approach enables to find 5 breakpoints. In order to identify cointegration relationships with changing regimes, the Gregory and Hansen method is used and results show cointegration with changing regimes. Vector error correction (VEC) models associated to cointegration with changing regimes are estimated. VEC looks at the dynamics on the short-term. Then economic and financial analysis is done and choc analysis is implemented with impulse response function. Furthermore, ARCH-LM test shows the existence of an ARCH vectorial model.

The paper shows how recent cointegration techniques are useful in including endogenous structural breaks leading to changing regimes.

Further investigations could be done to estimate whether one could be able to hedge commodity price fluctuations in using stocks whose markets are a lot more liquid.

ABSTRACT. In this paper, we assess the impact of oil price fluctuations on the UK economy. We use an empirical strategy which allows us to decompose oil price changes from the underlying source of the shock. We find that the consequences of oil price changes on UK macroeconomic aggregates depend on the different types of oil shocks. While increases in global real economic activity do not depress the UK economy in the short run, shortfalls in crude oil supply cause an immediate fall in GDP growth. As a consequence, the Bank of England sets the nominal interest rate depending on the nature of the shock hitting the oil market. Our results also show that domestic inflation increases following a rise in the real oil price. Finally, we find that in response to oil price increases, the government deficit decreases.

ABSTRACT. We build an equilibrium model to disentangle industry-specific from business cycle effects of oil on stock returns. Oil is considered as an input factor for production and also as a macro variable. We find that the value of all non-oil industries decreases with an oil price shock. The high persistence of the oil shocks makes these effects to be long-lived. This explains why the oil shocks can produce such a significant effects on the US financial market despite the low economy's oil intensity.

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