Increased Price Volatility Research Articles

Activating electricity system demand response for commercial and industrial organisations

ABSTRACT With the rapid uptake of renewable energy generation and increasing price volatility, there are multiple opportunities emerging for businesses to earn additional revenue and reduce electricity bills by implementing demand response. However, commercial and industrial consumer implementation of demand response is not well understood and largely absent in energy management guidelines, which focus on reducing energy consumption and driving energy efficiency. Based on interviews with managers from 24 commercial and industrial businesses, we describe a practical implementation framework for demand response. The framework identifies unique implementation features for demand response - the activation steps. Energy management guidelines may have underemphasised approaches to demand response and inclusion of its unique features for businesses because benefits to be gained from demand response have focussed on benefits for the utilities in the electricity system, not benefits for individual businesses. The article concludes there is an opportunity for market operators to encourage organisations who produce energy management guidelines to include demand response, to promote awareness of the opportunities for businesses and provide practical guidance for implementation, therefore providing support for greater renewable energy penetration and reduced energy costs for businesses.

Risky Business: Modeling the Future of Jamaica’s Coffee Production in a Changing Climate

Jamaica produces one of the most expensive coffees on the global market. The local specialty coffee industry plays a significant role in the island’s economy and also contributes to the livelihood of smallholders—the majority of whom operate the industry’s coffee farms. While climate model projections suggest that Jamaica will continue to experience a warming and drying trend, no study has assessed the future impacts of changing climatic patterns on local coffee-growing areas. This research developed a number of geospatial processing models within the ArcMap software platform to model current coffee suitability and future crop suitability across three Shared Socioeconomic Pathways (SSP1-2.6, SSP2-4.5, and SSP5-8.5) and three future time periods (2021–2040, 2041–2060, and 2081–2100). The results validated current locations of coffee production and revealed that there was an observable decrease in coffee suitability across the island, across all SSP scenarios and time periods under study. Most growing regions were projected to experience declines in production suitability of at least 10%, with the most severe changes occurring in non-Blue Mountain regions under the SSP5-8.5 scenario. Implications of this projected suitability change range from decreased production volumes, increased price volatility, and disruption to market operations and livelihood incomes. The paper’s findings offer stakeholders within Jamaica’s coffee industry the opportunity to develop targeted adaptation planning initiatives, and point to the need for concrete decisions concerning future investment pathways for the industry. It also provides insight into other tropical coffee-growing regions around the world that are facing the challenges associated with climate change.

Structural sources of oil market volatility and correlation dynamics

This paper explores the structural driving sources of oil market volatility and correlation dynamics using our derived volatility impulse response and correlation decomposition functions. A focal point of this paper is to conduct hypothesis tests for the observed diverging dynamics of oil market volatilities (a steady decline in oil production volatility and a concurrent increase in oil price volatility). In order to circumvent the restriction of uncorrelated disturbances in traditional structural models with stochastic volatility, we specify a time-varying level-volatility transmission matrix that allows for time-varying correlations between level and volatility innovations. Our model generalization hence captures transmissions of unexpected changes in oil levels to oil volatilities, and proves more adequate than traditional models for estimating oil market dynamics. Our results reveal several new useful insights for policy-makers, firms and investors. First, we find that a decrease in oil price persistence is at the origin of the diverging pattern of oil volatilities. Second, decreased variability of flow supply shocks is responsible for about 32% of the reduction in oil production volatility, while increased variability of demand-side shocks explains almost 60% of the increase in oil price volatility. Lastly, we find a near-zero correlation between oil production and oil price since the mid-1980s – a result that supports the theoretical prediction that oil production is inelastic to oil price changes.

Asymmetric volatility in the cryptocurrency market: New evidence from models with structural breaks

Previous literature shows that major cryptocurrencies exhibit inverse asymmetric volatility: positive shocks increase price volatility more than negative ones. In this study, we revisit the asymmetric volatility dynamics of major cryptocurrencies using asymmetric GARCH models that incorporate endogenously detected structural breaks. Our results show that after incorporating structural breaks, volatility persistence decreases and asymmetric volatility increases for all cryptocurrencies in this study. Thus, prior research that ignores structural breaks underestimates the impact of unexpected news on price volatility in cryptocurrency markets. We also present important economic implications of our results: ignoring structural breaks adversely affects the hedging strategies, derivatives valuations, and risk exposure measurement of investors in cryptocurrency markets.

Trade policy announcements can increase price volatility in global food commodity markets

Many countries use trade policy to insulate their domestic markets from price volatility. However, there is a widespread concern that such policies—particularly export restrictions—may amplify global price volatility, adversely affecting other countries. Here, using an original dataset on trade policy announcements on wheat and maize encompassing the food price crises of 2007–2008 and 2010–2011, we show that the announcement of trade policy changes can increase global price volatility. This effect applies not only to export restrictions but also to import liberalization measures and is most pronounced when markets are tight (stocks are low). Policymakers should work towards increasing stock levels to mitigate price volatility effects of trade policy changes. When markets are tight, export restrictions and import liberalizations should be avoided.

국제 유가 변동성이 국내 휘발유 가격 비대칭성에 미치는 영향

Purpose - This study examines the effects of Dubai oil price and the volatility on the asymmetry of domestic gasoline price adjustment. Additionally, the study investigates the effects of “Altteul” gas-station and tax-cut policies on asymmetry.
 Design/methodology/approach - Firstly, the study calculates proxies for asymmetry and volatility of each window(every 3-month) by error-correction model and GARCH(1, 1) using daily domestic gas price and Dubai oil price from 2008/04/15 to 2022/12/31. Secondly, the study investigates the effects of the increasing rate of Dubai oil price, volatility, “Altteul” gas-station and tax-cut policies on asymmetry. The autoregressive distributed lag regression model is employed for estimations.
 Findings - The study finds that changes in the increasing rate of Dubai oil price and both types of volatility of Dubai oil price increase asymmetry. While “Altteul” gas-station and tax-cut policies decrease asymmetry. Additionally, the study fails to find that asymmetry in the Korean gasoline market in the estimation with total observations.
 Research implications or Originality - An increase in Dubai oil price volatility means an increase in cost uncertainty for gas-station owners. Since cost uncertainty is a kind of financial risk, the increase in volatility reinforces the asymmetry. The study provides supporting evidence for the idea.

Information linkages in a financial market with imperfect competition

This study proposes a tractable imperfectly competitive economy where traders are socially connected with each other via an information network. We investigate the impact of information linkages on market equilibrium outcomes. In the linear-quadratic-normal framework, we first establish the existence and uniqueness of symmetric linear Bayesian Nash equilibrium. We then show that an increase of the level of information linkages decreases price impact, belief disagreement, return volatility and trading volume. Additionally, unlike the non-monotonicity results in large economies, we also show that increasing the level of information linkages always improves liquidity, increases price volatility, and decreases trading profits in our imperfectly competitive economy.

The influence of oil price uncertainty on corporate debt risk: Evidence from China

The uncertainty of international oil price has significant impacts on the macroeconomy and on firm-level business activities. It may affect the corporate economic activity through several channels and transmission mechanisms. This paper investigated the relationship between oil price uncertainty and corporate debt risk using the micro panel data of non-financially listed enterprises in China from 2010 to 2018. The results showed that an increase in oil price volatility deepens corporate debt risks, and the mediating and moderating effects demonstrated that oil price volatility indirectly worsens corporate debt risks through channel variables such as debt maturity, weakened solvency, and deepening zombification degree. Further analysis of the results indicated that the impact of oil price volatility on corporate debt risk is remarkably heterogeneous among different enterprises and is more serious in enterprises with lower financing constraints, in non-state-owned enterprises, and in energy-intensive enterprises.

The role of electricity flows and renewable electricity production in the behaviour of electricity prices in Spain

Electricity markets are becoming increasingly interconnected, in part, to deal with unpredictability and imbalances in electricity prices. This paper assesses how electricity flows and generation from wind and solar photovoltaic (PV) power impact the volatility and mean of day-ahead electricity prices in Spain. It finds there is a merit order effect from wind and solar PV power at most times of the day, which varies in magnitude for each of the 24 h. Electricity production from wind power is also found to play a clear role in increasing price volatility at all hours. Electricity inflow is shown to decrease both the mean and volatility of the electricity prices. The volatility of electricity prices is revealed to be highly persistent, and thus prone to large transmission shocks. This volatility is also susceptible to new shocks, which may indicate a tendency by market participants to overreact to unexpected shocks in electricity prices, possibly due to the relatively small size of the Iberian electricity market.

A unit commitment and economic dispatch model of the GB electricity market – Formulation and application to hydro pumped storage

We present a calibrated unit commitment dispatch model of the GB electricity market applied to an economic analysis of the four existing hydro pumped storage (PS) stations in GB. More variable renewable electricity (VRE) increases PS profit by an amount dependent on the generation mix. With a large share of coal, a 1 percentage point (p.p) increase in VRE increases total PS profit by an average of 2.3 p.p. With a more flexible system, to achieve a similar profitability, the share of wind and solar should rise to more than 60% of supply. Inflexible coal with high VRE increases price volatility that drives PS arbitrage revenue. Higher system flexibility smooths VRE variability and limits PS price arbitrage, increasing the role of PS balancing and ancillary service revenue. Between 2015 and 22 PS stations were inactive in managing transmission constraints but provided 18% of fast reserve, response and other reserve services in 2022. Stacking up the modelled revenue from price arbitrage and 2022 balancing and ancillary services revenues against the ongoing fixed costs suggests that the four existing PS stations are quite profitable. However, the revenues will not be enough to cover capex and opex of a new 600 MW PS station without more balancing and ancillary services market opportunities.

Repowering a Coal Power Unit with Small Modular Reactors and Thermal Energy Storage

In the first months of 2022, there was a sharp turn in the energy policy of the European Union, initially spurred by increasing energy prices and further escalated by Russia’s invasion of the Ukraine. Further transformation of the energy system will likely be accompanied by the gradual abandonment of natural gas from Russia and an increase of renewable and nuclear energy. Such a transition will not only increase energy security, but also accelerate the pace at which greenhouse gas emissions are reduced in Europe. This could be achieved more effectively if some of the new nuclear energy capacity is optimized to play an increased balancing role in the energy system, thus allowing for deeper market penetration of intermittent renewable energy sources with a reduced need for flexible fossil backup power and storage. A double effect of decarbonization can be achieved by investments in nuclear repowering of coal-fired units, with the replacement of coal boiler islands with nuclear reactor systems. Repowered plants, in turn, operate flexibly via integration with thermal energy storage systems using molten salt. This paper presents the results of a technoeconomic analysis for three cases of nuclear repowering of a 460 MW supercritical coal-fired unit in Poland. The first reference case assumes that three reactors are replacing the existing coal boilers, while the second reference leverages two reactors. The third uses two nuclear reactors equipped with a molten salt thermal energy storage system as a buffer for the heat produced by the reactor system. The analysis of the third case demonstrates how the TES system’s capacity varies from 200 to 1200 MWh, highlighting the possibility of obtaining a high degree of flexibility of the nuclear unit due to TES system without significant drops in the efficiency of electricity production. The economic analysis demonstrates that integration with TES systems may be beneficial if the current levels of daily variation in electricity prices are maintained. For current market conditions, the most attractive investment is a case with two reactors and a TES system capacity of 800 MWh; however, with the increasing price volatility, this grows to a larger capacity of 1000 or 1200 MWh.

China Real Estate Price and Stock Market Volatility during COVID-19

Purpose: This study examined the response of stock prices on the China Stock Exchange (SSE) and Real Estate prices to COVID-19 using an event study approach and the GARCH model. Methodology: In this study, the dimensions and key components of the use of large data obtained from the Internet of Things (IoT) in an industry's supply chain are investigated as a case study. Finally, a model for implementing an agile and lean supply chain based on IoT data analysis to improve the supply chain performance of these industries during emergency drug distribution during critical conditions is presented. Findings: We measure volatility spillovers by defining the volatility of each sector in the SSE index. In this study, we investigate the volatility of China stock market. Furthermore, we analyze the dynamic connectedness during COVID-19 pandemic periods to identify the changes in their relationship following the two categories. These empirical findings have several important implications for portfolio managers, policymakers, and investors. Originality/Value: This paper focuses on investigating the impacts of the novel coronavirus (COVID-19) on the China stock market volatility from a GHARCH and VAR model point of view. The GHARCH model used proves that during the COVID-19 pandemic, stock price volatility and real estate price volatility increases and lead to a decrease in abnormal returns. The empirical findings also validate the efficient market hypothesis theory related to the study of events and the theory of financial behavior related to uncertainty.

How does oil price volatility affect unemployment rates? A dynamic stochastic general equilibrium model

Although empirical evidence reveals a strong correlation between oil price volatility and unemployment, the transmission mechanism of these two variables is unclear. We theoretically examine the effects of oil price uncertainty shocks on the unemployment rate using a dynamic stochastic general equilibrium model incorporating a search-and-match component. We find that an unexpected increase in oil price volatility leads to a persistent increase in the unemployment rate. Comparing the oil price uncertainty shock with supply and demand uncertainty shocks in the final goods market, we observe that the oil price uncertainty shock has effects analogous to those of the supply uncertainty shock. In addition, we demonstrate that oil as a production input mitigates the adverse effects of uncertainty shocks to supply and demand sides of final goods market.

Trade, equilibrium prices and rents in European auctions for emission allowances

This paper analyzes the price behavior of Phase III (2013–2020) EU-ETS emission allowances of CO2 by focusing on the dynamics of daily auction equilibrium prices and on the changes of the volatility of the underlying stochastic process. The paper derives the main testable statistical hypotheses (particularly that about the determinants of the conditional variance of prices) on the results derived in a model of optimal bidders’ behavior given the ETS auction rules. Tests are conducted by estimating various versions of GARCH models for both mean and variance equations of price return. Results show that the price dynamics is affected by factors including a measure of excess demand/offer and the number of winning bidders and that, contrary to expectations, reforms of the auction rules introduced at the end of Phase III explain a great part of the increased price volatility. The increased volatility is also positively associated with the bid spread and negatively associated with the number of bidders active in each auction round.

Decision strategies in sequential power markets with renewable energy

With direct electrification at the core of global decarbonization efforts, it is key for policy makers to adequately evaluate market dynamics in renewable power systems. The ongoing integration of renewable energy sources fundamentally changes these dynamics, with variable production profiles, lower marginal production costs and increased price volatility. This motivates us to study how an increasing supply from renewable energy sources impacts decision making of intermittent and non-intermittent producers in sequential forward and spot markets. We do this by examining prices and volumes observed in an experimental trading environment that allows us to vary the market share of intermittent renewable energy production with a high degree of control. The results show that non-intermittent power producers, who can flexibly adjust volumes in the short-term, can retain their profits by moving focus from forward to spot markets. We find empirical support for our experimental results by validating data from German short-term power markets in 2021 and create awareness on the convenience yield for flexibility in power systems with a high market share of intermittent renewable energy sources. The study thereby guides policy makers to align supporting the uptake of intermittent renewable energy production with taking away hurdles faced by low-carbon flex technologies.

Price spikes, temporary price caps, and welfare effects of regulatory interventions on wholesale electricity markets

There is growing empirical evidence of increasing price volatility and price spikes in electricity markets as a result of variable renewable energy generation, extreme weather events, and other factors. While price spikes are needed to cover the fixed costs of power plants, they may also signal market flaws and anti-competitive behavior. Regulatory authorities have imposed market price caps to protect consumers and prevent abusive supplier behavior. In addition, some regulators have imposed temporary price caps during or after severe events; however, these caps may be driven by political motives rather than economic logic in weak institutional settings. This paper evaluates the welfare effect of the temporary price cap implemented in 2017 on the Turkish electricity market. By using matching and panel data methods, we show that the temporary price cap reduced the total welfare but did not affect market clearing price and projected supply. Our detailed analysis shows that this decision was driven by non-economic motives, and identifies a number of fundamental problems in the Turkish market that limit the effective functioning of the market.

The impact of commodity price volatility on fiscal balance and the role of real interest rate.

The objective of this study is to explore the impact of commodity price volatility on the governments’ fiscal balance. Using a dynamic panel data model for 108 countries from 1993 to 2018, this study finds that governments’ fiscal balance deteriorates with commodity price volatility, especially for commodity-exporting economies. A one standard deviation increase in commodity price volatility leads to a reduction of approximately 0.04 units in the fiscal balance as a percentage of gross domestic product. Further, we examine the role of real interest rates in influencing the relationship between commodity price volatility and fiscal balance. The empirical results suggest that the negative impact of commodity price volatility on fiscal balance can be mitigated with a lower real interest rate. This implies under the sticky price assumption, an accommodative monetary policy could be effective in moderating the negative effect of commodity price volatility on fiscal balance.

АНАЛІЗ ТОРГІВЛІ ДЕРИВАТИВНИМИ КОНТРАКТАМИ НА МІЖНАРОДНИХ БІРЖАХ

The article highlights the organizational principles of operations on international exchanges in modern conditions of deepening stock exchange consolidation and competition between existing stock exchange alliances. It was established that the global influence on the increase in price volatility of international and national commodity and financial markets became especially noticeable as a result of the war in Ukraine. Today, the prices of many types of commodity and financial assets that are traded on the world's leading stock exchanges have become extremely volatile. Derivative contracts still serve as the main tool in ensuring the minimization of price risks in the conditions of modern uncertainties and risks. It was noted that the organization of derivative contracts exchange trading requires the presence of a well-coordinated exchange infrastructure, in particular, an electronic exchange platform and a settlement and clearing mechanism. The theoretical essence of the exchange derivative contract is highlighted, as well as the classification of the types of derivative contracts on the exchange and over-the-counter markets. Proposed a theoretical definition of exchange-traded derivative contract as standardized term contracts concluded on the exchange and providing for obligations or the right to buy and sell underlying assets in the future. Currently, two types of derivative contracts are most actively traded on exchange platforms: futures and options. The current state of international trade in exchange derivative contracts is analyzed. An analysis of the derivative contracts trade evaluation on the leading commodity and financial exchanges indicates an acceleration of the growth rate in 2021. Thus, according to the statistical reports of the Futures Industry Association, a new number of trade volumes was recorded on derivative contracts international exchanges in 2021, which amounted to 62.58 billion transactions, which increased by a third compared to last year. The main trends in the international exchange market of derivative contracts are established and the main directions of the development of modern exchange trading in commodity and financial derivative contracts in the conditions of increasing level of influence of globalization are highlighted.

ESG Performance and Stock Price Volatility in Public Health Crisis: Evidence from COVID-19 Pandemic.

Unlike traditional financial crises, COVID-19 is a global public health crisis with a significant negative impact on the global economy. Meanwhile, the stock market has been hit hard, and corporate share prices have become more volatile. However, the stock prices of some enterprises with good performance of ESG (Environment, Social, and Governance) are relatively stable in the epidemic. This paper selects ESG rating data from MSCI (Morgan Stanley Capital International) with better differentiation, adopts multiple regression and dummy variables, and adopts the Differences-in-Differences (DID)model with the help of COVID-19, an exogenous event. Empirical test the impact of ESG performance on the company’s stock price fluctuations. The results show that the stock price volatility of companies with good ESG performance is lower than that of companies with poor performance. Second, COVID-19 exacerbates volatility in company stock prices, but the increase in stock price volatility of companies with good ESG performance is small. That is, good ESG performance helps reduce the increase in stock price volatility due to COVID-19 shock, and plays a role in enhancing “resilience” and stabilizing stock prices. This paper provides new empirical evidence for the study of ESG performance and corporate stock price volatility, and puts forward relevant policy recommendations for enterprises and government departments.

Does the Launch of Shanghai Crude Oil Futures Stabilize the Spot Market? A Financial Cycle Perspective

Based on the examination of price discovery between Shanghai crude oil futures and the spot market, this paper explores whether the introduction of Shanghai crude oil futures can play a stabilizing role in the spot market, alleviating the impact of the financial cycle risk on the crude oil market from March 2018 to December 2019. The results show that there is only a uni-directional relationship of the spot price to futures price, and spot plays a leading role in price discovery. The risk of the financial cycle will increase the volatility of spot price, and the introduction of crude oil futures market can increase the impact of the financial cycle on the spot market. The additional research on the microcosmic mechanism of Shanghai crude oil futures indicates that crude oil futures market mainly influences the spot market fluctuation through the behaviour of traders: speculation increases price volatility in the spot market, which is more pronounced in the high volatility of the financial cycle as oppose to hedging transaction.