Intermediate Price Research Articles

Does the price of crude oil help predict the conditional distribution of aggregate equity return?

Contrary to point predictions that only convey information about the central tendency of the target variable, or the best prediction, density predictions take into account the whole shape of the conditional distribution, which means that they provide a characterization of prediction uncertainty. They can also be used to assess out-of-sample predictive power when specific regions of the conditional distribution are emphasized, such as the center or the left tail. We carry out an out-of-sample density prediction study for monthly returns on the Standard & Poor’s 500 index from 1859m9 through 2017m12 with a stochastic volatility benchmark and alternatives to it that include the West Texas Intermediate price of crude oil. Results suggest that models employing certain nonlinear transformations of the price of crude oil help deliver statistically significant density prediction improvements relative to the benchmark. The biggest payoff occurs when predicting the left tail of the conditional distribution. They also generate the earliest signal of a market downturn around the 2008 financial crisis.

Phantom Liquidity and High-Frequency Quoting

This article examines every NASDAQ ITCH feed message for S&P 500 Index stocks for 2012 and identifies clusters of extremely high and extremely low limit-order cancellation activity. The authors find results consistent with the idea that cancel clusters are the result of high-frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different, with many level changes all caused by executions. The results are consistent with high-frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. The authors also discuss the misconception that investors and low-frequency traders are synonymous and its implications for policy given these results.

Is the Permian Barreling Toward a Breaking Point?

The next year could spell trouble for operators producing oil in west Texas and southeastern New Mexico. The Permian Basin currently has more crude than it can handle, and production there continues to grow at a steady rate month-over-month after surpassing 3 million B/D earlier this year, according to data from the US Energy Information Administration. Pipeline takeaway capacity isn’t sufficient and won’t be until the second half of 2019. There aren’t nearly enough trucks or truck drivers to make up the difference, and any meaningful expansion of crude-by-rail transport is restricted by infrastructure and business-related constraints. Both options are already competing with movement of equipment and supplies such as sand and water, demand of which has also grown—along with their costs—to support the continued production growth. Many operators in the basin struggled to generate positive cash flow even before the bottlenecks became an issue. Now, the price of the crude they’re producing is trading at a big discount vs. spot prices in Houston, near the Gulf Coast refining and export center; and Cushing, Oklahoma, the crude trading hub from which the West Texas Intermediate (WTI) price is derived. The spread between Midland crude and WTI grew to double digits in May, spiking from roughly $1 a couple months earlier. If WTI prices were closer to where they were a year ago, the impact of the spread immediately “would have been significant for almost every operator,” noted R.T. Dukes, Wood Mackenzie US Lower 48 upstream research director. Fortunately for Permian operators, WTI prices have been much higher than the range of prices for which they budgeted coming into the year, minimizing the impact of the spread thus far. But WTI prices aren’t guaranteed to remain that high, and differentials could grow—just look at the Western Canada Select heavy crude price, which has traded at up to a $30/bbl discount to WTI this year due in large part to transportation constraints. The spread forced operators such as Cenovus, Husky Energy, and Canadian Natural Resources to slow their oil sands production during the first quarter. Permian operators are similarly being forced to examine whether continued growth over the next year is sustainable or even worthwhile. Their exposure to Midland spot prices varies, ranging anywhere from less than 5% to 50–60% of Permian production, said John Coleman, Wood Mackenzie senior analyst, North American crude oil markets. Most operators are in the 20–30% range, meaning there already has been a modest hit to cash flow, he said. Consultancy Rystad Energy believes the Midland vs. Cushing spread will “stay very much depressed” into mid-2019 and “won’t be surprised” if it moves into the low $20s/bbl, said Artem Abramov, Rystad vice president, shale analysis. “Everything points to the situation getting worse and worse going forward.”

Say’s Law, Marxian Crisis Theory and the Interconnectedness of the Capitalist Economy

ABSTRACTScholars have long debated exactly why Marx felt that general gluts were not just possible, but inevitable. This article argues that Theories of Surplus Value anchored that necessity in the complex interconnectedness that characterizes capitalist production. There, Marx’s criticism of Say’s Law builds on a version of crisis theory that begins with raw material shortages in a leading sector. The disturbance is then transmitted through the many inter-industry linkages in the capitalist economy. What starts as a supply-side shock in a leading sector is transformed into a broad crisis of aggregate demand as workers are laid off and businesses fall into insolvency. This article argues that Marx’s later discussion of other types of crises in Capital can be read as consistent with this approach. A severe profit squeeze in a leading sector (whether originating in intermediate good prices, market demand, rising wages or rising use of fixed capital) necessarily turns into a general glut. In this context, Say’s Law becomes an irrelevant theorem concerning an imaginary economy. What Marx sees as fundamentally new under capitalism is not the use of money and the separation of sale and purchase, but massive interconnectedness.

Dramatic Enrollment Shifts Plague Petroleum Engineering Programs

The sharp oil price volatility during 2014–16 is now being felt by US undergraduate petroleum engineering (PE) programs, where enrollment is in steep decline after hitting record highs at the onset of the price downturn. The number of US students pursuing bachelor’s degrees in PE programs fell to 6,263 in fall 2017 from 8,712 in fall 2016 as attitudes toward the discipline continued to shift, according to data compiled by Lloyd Heinze, PE professor at Texas Tech University’s Bob L. Herd Department of Petroleum Engineering. Enrollment in fall 2015 remained elevated at 11,069, slightly lower than a peak of 11,474 in fall 2014 when the oil price crash was under way—meaning it took 2 years before enrollment numbers began tracking oil prices. “Students are starting to realize the job market is very different from when they started out as freshmen,” said Heinze, who has followed PE enrollment trends for decades. A student who is slated to graduate with a BS in PE this spring, for example, likely enrolled in fall 2014 after West Texas Intermediate (WTI) prices had spent much of the year at more than $100/bbl. In their sophomore year, WTI cratered to $26/bbl before stabilizing in the $40-60/bbl range for their junior and senior years. With fewer students in the pipeline, fewer graduates are expected in the coming years, reversing an oversupply of those trying to enter the workforce. The number of undergraduate PE degrees granted is projected to plunge from more than 2,000 in each of 2015–16, 2016–17, and 2017–18 to around 1,220 in 2018–19 and 680 in 2019–20, Heinze’s data project. At 470 and 130, respectively, master’s degrees and PhDs granted are expected to remain somewhat elevated in 2017–18 compared with their averages during the previous decade. The steadier post-grad numbers may be supported in part by fewer available jobs. One Extreme to Another Heinze noted that Texas Tech’s PE department, like many PE departments across the country, is still reeling from the “tremendous overload” of students in recent years, a problem over which it had no control. “I can tell you that even if oil prices last year were $100/bbl, we were already on track to put out more students than $100/bbl can support.” Many public university PE programs are at the mercy of how many prospective students meet published admissions requirements. That is to say, programs cannot simply deny qualified students because those programs’ faculties, resources, and even lecture halls have become overextended. As a result, average undergraduate student-faculty ratios ballooned to about 46:1 in fall 2013.

Flexibility and Frictions in Multisector Models

This paper documents two facts: (i) elasticities of substitution in production vary significantly across sectors, with manufacturing sectors being generally less flexible than service sectors, and (ii) during the Great Recession the rise in bond spreads varied systematically with these elasticities. Specifically, more flexible sectors paid lower spreads during the Great Recession. Moreover, among the less-flexible manufacturing sectors, sectors with relatively high flexibility and high debt saw their spreads rise less than average, while among the more-flexible service sectors the sectors with relatively high flexibility and high debt saw their spreads rise more. We interpret these results using a simple two-sector model with working capital constraints, and show that the model replicates these observations if manufacturing sectors face constraints on their purchases of intermediates while services face constraints on their purchases of labor/capital. The dynamics of intermediate prices and quantities support our results, as does a quantitative investigation of a 62-sector version of the US economy.

The Intermediate Price of Anarchy ([formula omitted]) in bin packing games

In the case of bin packing items with positive sizes are packed into a minimum number of bins, such that the total size of items in any bin is at most 1. We consider the bin packing game where the cost of a bin (i.e., 1) is shared among the items in the bin proportionally to their sizes. Any item can move to another bin if it fits and after the move the item will pay less for being in the new bin. A packing is called a Nash Equilibrium (NE) if no item can benefit from moving in this way. The price of anarchy (PoA) is the asymptotic worst-case ratio between the number of bins in an NE and of bins in a (socially) optimal solution. A much stronger concept of a stable packing is the Strong NE (SNE), where no coalition of items can move so that each member of the coalition reduces its own cost by the move. If we compare the SNE packings with the optimal packings, we get the measure called SPoA (strong price of anarchy).We define a new kind of equilibrium as follows. An item i in bin B with size si has an improving step to move into a target bin B′ if there is an empty or not empty set S of items in the target bin, so that (i) si is strictly bigger than the total size of items of S, (ii) after removing the items in S from the target bin (and putting them into B) item i fits into the target bin, and (iii) the level of the target bin after the move is bigger than the level of the bin where item i was before the move. It is clear that if such move is possible, then moving is advantageous for item i, as it will have to pay less. If no such move is possible, the packing is called Intermediate NE (INE), and the related measure is called IPoA. By definition, the value of IPoA is betweenSPoA and PoA.It is known (Epstein and Kleiman, 2011) that the PoA lies between 1.6413 and 1.6428; moreover the exact value of the SPoA was found recently Epstein et al. (2016) (this value is approximately 1.6067). We will prove that the IPoA of the bin packing game is very close to the value of SPoA, namely it is no bigger than 1.6095.

Design of Backpack to Aid Elderly for the Mazu Touring Procession in Taiwan

The Dajia Mazu Touring Procession is a 9-day long religious event held annually. However, for the elderly participants, it is a big burden especially in regards to physical strength. The goal of designing backpack is to reduce the physiological stress of elderly during the procession. Firstly, physical parameters were measured to explore the dimension parameters by testing. The height of the chair is different from that of the kneeling pad; a smooth curve was chosen to coordinate the two as the main outline of the backpack. Secondly, material selections based on following limits were considered: (1) acceptable weight and size, (2) intermediate price and (3) a design that is fitting to the Dajia event. The material and structural strength were evaluated for wood, bamboo, stainless steel. Two design concept were proposed, wood is selected for construction and testing by users. The texture of the backpack is Rush grass, it was built successfully to cover the backpack’s external surface to meet local culture features.

Directional dependence via Gaussian copula beta regression model with asymmetric GARCH marginals

ABSTRACTThis article proposes a new directional dependence by using the Gaussian copula beta regression model. In particular, we consider an asymmetric Generalized AutoRegressive Conditional Heteroscedasticity (GARCH) model for the marginal distribution of standardized residuals to make data exhibiting conditionally heteroscedasticity to white noise process. With the simulated data generated by an asymmetric bivariate copula, we verify our proposed directional dependence method. For the multivariate direction dependence by using the Gaussian copula beta regression model, we employ a three-dimensional archemedian copula to generate trivariate data and then show the directional dependence for one random variable given two other random variables. With West Texas Intermediate Daily Price (WTI) and the Standard & Poor’s 500 (S&P 500), our proposed directional dependence by the Gaussian copula beta regression model reveals that the directional dependence from WTI to S&P 500 is greater than that from S&P 500 to WTI. To validate our empirical result, the Granger causality test is conducted, confirming the same result produced by our method.

Government-Expenditure Crowding-In Effect and Lack of Economic Diversification in Oil-Producing Countries: Lessons from Alberta

In this paper, I examine the impact of oil price shocks, government expenditure, and Chinese investments in the energy sector on Alberta’s economy. The aim is to understand how government expenditures transmit oil-price changes to the economy, thereby exacerbating economic cycles in Alberta, an oil-exporting region, and to provide policy recommendations that could help Alberta benefit from future oil price drops. To my knowledge, I am the first to examine the effects of oil price changes, government expenditures, and investments from China on Alberta’s economy, accounting for inter-industry and household demand effects. I find evidence that Alberta’s manufacturing sector depends heavily on the oil and gas sector; government expenditure has a crowding-in effect that exacerbates economic cycles; Chinese investments in Alberta’s energy sector contribute positively to Alberta’s economy; and West Texas Intermediate (WTI) oil price is an important factor. I use actual WTI values and oil future values to simulate and forecast key explanatory variables. The results are robust to different variations of the model, and when creating in-sample and out-of-sample forecasts. The results of my analyses yield three policy recommendations for Alberta: (a) implement a long-term counter-cyclical fiscal policy, preferably during a boom period; (b) diversify both the oil and gas sector (to increase petroleum product exports) and the manufacturing sector (to increase non-oil related production); and (c) open the economy to additional foreign investment.

Influence of Oil Price Volatility of Developed Countries on Emerging Countries Stock Market Returns by Using Threshold Based Approach

This study reveals the nonlinear relationship between oil price volatility of the developed countries and emerging stock market returns. We analyzed the effects of oil price volatility of the developed markets i.e. India, United States and United Kingdom on the emerging stock market returns. We used VAR, Granger Causality, impulse responses and logistic transition based autoregressive model (LSTR) in two groups. In group one, we considered US oil price volatility with six emerging countries and regions stock market returns i.e. France, Spain, Malaysia, Japan, Singapore and Taiwan. In group two, we considered oil price with respect to India with the same six emerging countries stock market returns. The data covers the daily closing prices for seven years from 2011 to 2017 for emerging countries and for oil prices the data we use West Texas Intermediate (WTI) spot price of crude oil for US and India. This study helps the investors to understand the impact of oil prices of US and Indian market with respect to emerging markets and whether to identify the dependency of emerging stock markets returns on the oil prices of US and India. All the analysis was performed by using R and EVIEWS software.

The relationship between global oil price shocks and China's output: A time-varying analysis

We employ a class of time-varying Bayesian vector autoregressive (VAR) models on new standard dataset of China's GDP constructed by Chang et al. (2015) to examine the relationship between China's economic growth and global oil market fluctuations between 1992Q1 and 2015Q3. We find that: (1) the time varying parameter VAR with stochastic volatility provides a better fit as compared to it's constant counterparts; (2) the impacts of intertemporal global oil price shocks on China's output are often small and temporary in nature; (3) oil supply and specific oil demand shocks generally produce negative movements in China's GDP growth whilst oil demand shocks tend to have positive effects; (4) domestic output shocks have no significant impact on price or quantity movements within the global oil market. The results are generally robust to three commonly employed indicators of global economic activity: Kilian's global real economic activity index, the metal price index and the global industrial production index, and two alternative oil price metrics: the US refiners' acquisition cost for imported crude oil and the West Texas Intermediate price of crude oil.

Phantom Liquidity and High-Frequency Quoting

This paper examines every NASDAQ ITCH feed message for the S&P 500 stocks for 2012 and identifies clusters of extremely high and extremely low limit order cancellation activity. We find results consistent with the ideas that cancel clusters are the result of high frequency traders jockeying for queue position and reacting to information to establish a new price level. Furthermore, few trades seem to be executed during cancel clusters or even immediately after them. Low cancellation activity seems to be markedly different with many level changes all be caused by executions. Our results are consistent with high frequency trading firms behaving as agents who bring efficiency to the market without the need to have executions at intermediate prices. We also discuss the misconception that investors and low frequency trader are synonymous and its implications for policy given our results.

The global interdependence among oil-equity nexuses

We propose a global network model to investigate the interdependence among the oil-equity nexuses from different countries in various time horizons based on wavelet coherence and gray correlation. The stock indexes from 28 countries and crude oil prices of WTI (​West Texas Intermediate price) and Brent are the sample. We obtain the following primary results: Oil-equity nexuses throughout the world are well-integrated across time scales; Ireland, the Netherlands, Norway, Singapore, Demark, Germany and the Czech Republic for Brent-stock nexuses and Ireland, the Netherlands, Netherlands, Singapore, Japan, Germany and Malaysia for WTI-stock nexuses, successively corresponding to the frequency bands of 4 days–256 days, can be treated as a benchmark and can spread their fluctuations to other nexuses easily and rapidly. By contrast, China is more isolated in most time horizons and could be the ideal risk-hedging choice. Next, the global interdependence among oil-stock nexuses is characterized by the clustering effect, by which geographical factors and the oil production-consumption profile can exert their influence in most time horizons. In contrast, the speculation deals as well as energy policy and stagey are primarily influential in certain frequency bands. Thus, the decision-making for different time horizons could consider corresponding references.

Real Rigidities and Nominal Price Changes

Real rigidities can help to generate persistent effects of monetary policy shocks. We analyse an industry equilibrium model with two types of real rigidities: a ‘micro’ real rigidity from a kinked demand curve, and a ‘macro’ real rigidity due to sticky intermediate prices. We estimate key model parameters using micro data from the US CPI, which features big movements in relative prices within and across sectors. The micro real rigidity necessitates large idiosyncratic shocks to productivity. The macro real rigidity does not entail such large idiosyncratic shocks, and is consistent with the volatility of sectoral TFP growth.

Setting prices in mixed logit model designs

We investigate different procedures to set prices in designs for choice-based conjoint analysis using the mixed logit model which captures latent consumer heterogeneity. Besides discrete attributes, we include a linear price term in the deterministic utility function thereby treating price as continuous variable. We consider two different price intervals and several price sets which contain either two or three prices. We compare these alternatives to set prices by simulating choices for different constellations on the basis of the mixed logit model. Furthermore, we generate ten designs simultaneously instead of just one. Using these simulated choices, we estimate the parameters of the mixed logit model in the next step. To reduce the needed sample size and computation time caused by accounting for latent consumer heterogeneity, we apply Halton draws and set a minimum potential design for prior draws. ANOVA with root mean squared error between estimated and true price coefficient values of individual consumers as dependent variable shows that using more extreme prices as interval bounds and one intermediate price positioned to the right of the interval performs best.

Price image consequences

This study investigates the consequences of price image. Two conditions, a policy of intermediate price condition and a policy of low price condition, were distinguished in an experiment. Three moderators (consumers' price conscientiousness, retailer's motives perceived by consumers and consumers' familiarity with the retailer) were considered for these two conditions. Using partial least squares analyses (PLS), we propose integrated models of the consequences of price image highlighting the direct and indirect effects of this concept on consumers' satisfaction, trust, attitude and future behavioral intentions to the retailer. This research fills a gap in the literature since previous studies have mainly focused on the antecedents of price image or have only investigated specific links between the variables considered. Finally, considering our findings, we recommend to managers to favor either a policy of intermediate or low price depending of their consumers' characteristics.

How to position ‘mildly sustainable’ products: The joint impact of assortment display and price setting

To tempt consumers towards more sustainable food choices, ‘intermediately’ sustainable products (i.e., in between conventional and organic) have been introduced. This poses the managerial question how to best position this range of products. In an experiment with intermediately sustainable meat products, we show that the choice share of these intermediate products is high when price level and physical display signal a consistent positioning of these products. This implies that the effect of layout depends on the price level at which intermediately sustainable products are offered. When these products are offered at intermediate prices, displaying them in a separate section will increase choice (i.e., unique feature positioning). Yet, when intermediately sustainable products are offered at low prices, a mixed display in which intermediately sustainable and conventional products are dispersed will be more effective in increasing choice for the intermediately sustainable options (i.e., comparative positioning). These results show the importance of assortment display in affecting the sales potential of products, and how the most optimal display in-store depends on price level.

Utilizing Topographic Finance to Understand Volatility

Visual representation methods are a common problem in econometrics and finance in order to describe system dynamics. In this paper we address this problem by using the bi-harmonic oscillation process and the Brownian motion components, to generate a three-dimensional volatility surface.The empirical analysis have been carried out on the S&P500 Index, the 10-year US Treasury Rates, and the West Texas Intermediate oil price, by using 85 daily closing observations, at the purpose to show how visualization of volatility can help understand longitudinal movements of price within different asset classes.

NGDP Targeting: Is 5 Percent Too Much?

This paper examines whether the market monetarism prescribing a 5% yearly NGDP growth rate was too much between the dot-com and the subprime mortgage crises. To do this I search for evidences of monetary disequilibrium in other variables such as trend deviations, the behavior of intermediate prices, and interest rates. I find evidences that suggest that the 5% growth of NGDP in the years prior to the crisis might have been excessive. Although this observation does not question the principle behind NGDP targeting, it suggests that the target should be carefully chosen. This result is also consistent with the interpretation that monetary policy was too loose for too long from 2002 to 2007 following other indicators such as the Taylor Rule.