Market Price Volatility Research Articles

Investigating the Linkages between U.S. CDS Spreads and Both the Equity Market Price and Equity Market Volatility Channels: A Quantile Regression Approach

Investigating the Linkages between U.S. CDS Spreads and Both the Equity Market Price and Equity Market Volatility Channels: A Quantile Regression Approach

GENCOs multiperiod expansion model in a competitive electricity market

Over the past two decades, several countries have restructured their electricity industry by significantly reducing the government’s role in the ownership and management of energy sector. The generation sector was the first activity of the vertically integrated industry to be open for the competition and therefore, it presents the highest level of competitiveness and experience. In the new restructured electricity markets, the objective of each generation company (GENCO) is to maximise its total expected profit over a planning horizon while following the grid-code and system operators’ directive for the safe operation of the power system. In the expansion plan of generating companies, the problem is to be reformulated incorporating several uncertainty factors such as demand growth, the volatility of market prices for electricity and fuels, delay in project completion, financial constraints, etc. In this paper, a long-term multi-period expansion model for a generation company operating in the deregulated electricity industry is presented. The effectiveness of the proposed approach is demonstrated on numerical examples.

The value of information in cross-listing

Until 2004, the London Stock Exchange allowed firms to be traded in the specialized SEAQ-I platform without the firm's involvement. Trading only required an application by one LSE trading member firm. Such an institutional arrangement, which made cross-listings possible without a firms' approval, allows for a direct test of different theories of foreign listing. In particular, we can differentiate between market segmentation and liquidity hypotheses, which rely on a firm trading in a foreign exchange and informational hypotheses, which assume that a firm makes the decision to trade in a foreign exchange. We identify a sample of international firms that are admitted to trading on London's SEAQ-I platform without their involvement. We estimate the valuation effects of this multi-market trading event and compare them to those enjoyed by firms that pursue a standard London Stock Exchange cross-listing. A cross-sectional abnormal returns analysis documents significant evidence in support of information-related hypotheses of cross-listing. An analysis of the firms' home market price volatility corroborates the results.

Economics of energy crops in Poland today and in the future

Perennial energy crop development is just starting in Poland and there are great expectations on this sector to make a substantial contribution to the achievement of renewable energy targets defined in the European Union (EU) directive 28/2009/EC. Insights into the economics of energy crop production may lead to a better understanding of the dynamics of developments in the field. This work addresses current and future economics of willow, Miscanthus and triticale (a whole crop) production for energy use in Poland. The economics of energy crops is set next to that of common cereal production for grain. Potential cost reductions of energy crops in the future are investigated with regard to the hypothetical impact of scale effect, as well as the combined effect of scale and technology developments. Results indicate that for the assumed biomass prices applied, willow is profitable while Miscanthus and triticale generate loss. The volatility of cereal market prices is found to significantly affect the competitiveness of energy crops compared to grain production. Willow and Miscanthus are produced with lower costs compared to triticale. Furthermore, the economics of perennials are less susceptible to changes in agricultural inputs prices compared to annual crops. For the first farmers to cultivate energy crops, the costs are high, however, there are large opportunities for cost reduction due to the economics of scale and technology developments. With the expected increase in biomass market demand and biomass prices, energy crops should be profitably produced in the future. (C) 2011 Elsevier Ltd. All rights reserved. (Less)

How does oil price volatility affect non-energy commodity markets?

The influence of price volatility in the crude oil market is expanding to non-energy commodity markets. With the substitution of fossil fuels by biofuel and hedge strategies against inflation induced by high oil prices, the link between crude oil market and agriculture markets and metal markets has increased. This study measures the influence of the crude oil market on non-energy commodity markets before and after the 2008 financial crisis. By introducing the US dollar index as exogenous shocks, we investigate price and volatility spillover between commodity markets by constructing a bivariate EGARCH model with time-varying correlation construction. The results reveal that the crude oil market has significant volatility spillover effects on non-energy commodity markets, which demonstrates its core position among commodity markets. The overall level of correlation strengthened after the crisis, which indicates that the consistency of market price trends was enhanced affected by economic recession. In addition, the influence of the US dollar index on commodity markets has weakened since the crisis.

Price Volatility in the Food Markets

Food price volatility has spiked to levels last seen in the 1970s. For low-income countries, food price hikes, such as have occurred recently, tend to significantly increase the incidence of intra-state conflicts, according to IMF research. The 2007-2008 food crisis, and the resumption of more recent food price spikes, clearly have a number of causes. That said, in reviewing over a century of commodity price volatility, there are episodes of low volatility and high volatility, which would indicate that this may be a pattern of recurrent phenomena. As a result, it may be wise to focus on how to manage price volatility rather than believe that this phenomenon can be eradicated.

Best Practices for Dealing with Price Volatility in Utah's Residential Construction Market

Price volatility is a problem that affects each discipline involved in the residential construction industry. The myriad factors that can have an impact on construction costs are such that it is extremely hard to anticipate upcoming changes in a timely and accurate way. When prices fluctuate during the course of a project, estimates become erroneous and completion of projects within expected budgets becomes difficult. Increasing prices typically leave contractors with the majority of the risk burden due to the enforceability of contracts were likely executed months prior. Numerous methods have been developed for managing the risk of price volatility. The various methods available are implemented based on the disciplines involved, the types of contracts being used, and the existing market conditions. Typical practices transfer the risk of price volatility to other involved disciplines, be it the owner, the contractor, subcontractors, or suppliers. However, no method has proven completely effective at removing the risks associated with price volatility. Involved disciplines need to utilize a combination of best practices to protect themselves. They need to coordinate and communicate with the other disciplines to ensure that the risk of price volatility is appropriately accounted for and managed throughout the construction process.

Exploring the relationship between investor sentiment and price volatility

By performing Grey relation analysis, this study elucidates the relationship between investor sentiment and price volatility in the Taiwanese stock market. A sequential relationship is identified between investor sentiment and price volatility, and ranked according to order of importance. Analytical results show that short sales volumes may be an individual leading indicator useful in observing the effects of sentiment on price volatility, followed by open interest put/call ratios and trading volumes, and buy/sell orders. Institutional investors are related, to a lesser extent, to price volatility and sentiment. Qualified foreign institutional investors, or more rational investors, are the least influenced by price volatility, followed by securities investment trust companies and dealers. TAIEX options exert the strongest influence on sentiment during the study period, making them a valuable reference for gauging price volatility.

Valuing Investments in Multi-Energy Conversion, Storage, and Demand-Side Management Systems Under Uncertainty

In this paper, a financial valuation method for energy hubs with conversion, storage, and demand-side management (DSM) capabilities is proposed. An energy hub is an integrated system of units, e.g., a combined heat and power plant and a heat storage, which allows the conversion and storage of multiple energy carriers. In this paper, an extended energy hub model is presented which additionally takes into account the possibility of performing DSM with the load(s) connected to the hub output. Taking into account the energy hub's flexibility to change its output power(s), its economic value is determined with a method based on Monte Carlo simulation. This method calculates an optimal dispatch of the hub for a large amount of possible price paths of the input and output energy carriers. By means of the proposed energy hub Monte Carlo valuation model, integrated systems of multi-energy conversion and storage devices can be valued together with load management schemes. In doing so, the energy hub's ability to flexibly adapt its output to uncertain and volatile market prices is explicitly considered.

A Modeling of Banks Systemic Risk in a Levy Process Framework

The focus of the debate on bank management and regulations has been largely on financial risk. In 2010, the Basel Committee on Banking Supervision through its Basel III established tougher capital standards. The new reform will fundamentally impact on profitability and require transformation of the business models of many banks. The Basel accord consider policy options designed to reduce risks related to the failure of systematically relevant, cross - border institutions. In this paper, we discuss a model contributing to the debate of systemic risk in the banks, because they are pivotal for the availability and cost of capital. We classify systemic risk into two definitions: firstly, a risk resulting in increases in the cost of capitals or decreases in its availability, often evidenced by substantial financial - market price volatility. Secondly, a risk of an economic shocks such as market or institutional failure triggers either the failure of a chain of markets or institutions or a chain of significant losses to financial institutions.We follow a situation characterized in the second definition. In this regard, we consider a L´evy process-driven model that enable us to investigate the stochastic dynamics of banking items. These stochastic dynamic models enable us to analyze framework for solving the problem of systemic risk, focusing on regulatory solution. The solution will consolidate the regulation of financial risk maximizing economic stability and efficiency. We strengthen our discussion by identifying goals which enable us to determine the best approaches for regulating systemic risk. Finally, we conclude by briefly analyzing some of the main issues arising from the above discussion. An illustrative example and numerical results is used to highlight some of the achievements of the paper.

Temporal Changes in Shiller's Exuberance Data

Robert Shiller’s’ Paper on ‘The Volatility of Stock markets Prices’ published in 1987 uses dividend data and real interest rates to seek evidence that true investment value changes through time sufficiently to justify the price changes. His paper concluded that most of the volatility of the stock market prices appears unexplained. Shiller volatility or fluctuations prove that behavior of markets is not normal. Non normal distribution series is a widely followed proof of inefficiency in prices. The authors of the current paper reanalyze Shiller’s data not for the change but for rate of change. The rate of change in dividend values, interest rates and market price is used to isolate temporal changes (time durations) defined in days. Though on one side the time duration data illustrate a non normal distribution and confirms Shiller’s non normalcy finding within value (fundamental data) and market data, it opens a larger debate suggesting temporal changes to be the reason for market volatility and inefficiency.

소비자 효용을 고려한 실시간 요금제의 Load Serving Entity 수익 설계 방안

Real Time Pricing(RTP) is used not only to stabilize the price volatility in electricity market, but to hedge the price risk for Load Serving Entity(LSE). This paper presents an efficient method to reduce the risk of the price volatility in real-time electricity market. For designing the RTP, load patterns of customer are calculated by applying the demand elasticity and customer's utility is also analyzed to compute the RTP revenue through the risk-attribute of the LSE. In the end, the distribution of the LSE's profits can be evaluated to lead the optimal RTP value, depending on the level of customer's participation. Results from the case study based on PJM data are reported to illustrate the proposed method.

Transaction Costs and Price Volatility: New Evidence from the Tokyo Stock Exchange

We investigate the volatility impacts of the full commission deregulation in Japan in October 1999, and find that the deregulation overall tends to significantly increase price volatility in the Japanese equity market, using alternative model specifications and control variables. This finding contrasts with previous evidence that implies a positive relation between transaction costs and price volatility, while consistent from the converse with the hypothesis proposed by Stiglitz (1989) and Summers and Summers (1989). Our results suggest that imposing higher transaction costs might still be a feasible policy tool for stabilizing the market by curbing short-term noise trading.

Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market

We study the impact that algorithmic trading, computers directly interfacing at high frequency with trading platforms, has had on price discovery and volatility in the foreign exchange market. Our dataset represents a majority of global interdealer trading in three major currency pairs in 2006 and 2007. Importantly, it contains precise observations of the size and the direction of the computer-generated and human-generated trades each minute. The empirical analysis provides several important insights. First, we find evidence that algorithmic trades tend to be correlated, suggesting that the algorithmic strategies used in the market are not as diverse as those used by non-algorithmic traders. Second, we find that, despite the apparent correlation of algorithmic trades, there is no evident causal relationship between algorithmic trading and increased exchange rate volatility. If anything, the presence of more algorithmic trading is associated with lower volatility. Third, we show that even though some algorithmic traders appear to restrict their activity in the minute following macroeconomic data releases, algorithmic traders increase their provision of liquidity over the hour following each release. Fourth, we find that non-algorithmic order flow accounts for a larger share of the variance in exchange rate returns than does algorithmic order flow. Fifth, we find evidence that supports the recent literature that proposes to depart from the prevalent assumption that liquidity providers in limit order books are passive.

Assessing suppliers for strategic integration: a portfolio approach

Since Kraljic’s (1983) seminal work, purchasing departments in the most successful organisations adopted portfolio approaches to supplier management. However these models fail to consider final market demand and price volatility, thus leading buyers to establish with suppliers long-term relationships also when the investments are not properly rewarded. Moreover, portfolio approaches provides high level guidelines seldom integrated with operative tools such as vendor rating systems. This paper presents a new portfolio model that, taking into account final market features, indicates both the level of right buyer-supplier integration and the evaluation parameters to assess when choosing the supplier for that relationship. Expert interviews and a case study have been performed to test the proposed model. The results indicate that, for high supply market risk, strategic product must be purchased with different strategies depending on the difficulty of the downstream market. Moreover, different parameters shoul...

A note on price volatility in the Australian electricity market

Efficiency in electricity transmission has been a worldwide `hot topic' for more than ten years and has led to reforms in many countries. However, the performance of the restructured electricity markets is often questioned since it depends, to a large extent, on the way market participants collectively respond to market rules and procedures. We examine data from Australia's National Electricity Market with emphasis on variability in spot prices. These data indicate that the structure of electricity generators' bidding offers may be one of the important contributors to the volatility in electricity prices. A scheme for reducing the volatility of spot prices is then proposed in the form of new regulations on the structure of generators' electricity price and volume bids. References Australian Bureau of Statistics: Year Book Australia, Energy: Special Article---Reforms in the Australian Electricity and Gas Industries, http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/C50CABC70C99E249CA2569E3001FF8A5?OpenDocument A. Kay-Spratley, A. Worthington and H. Higgs, Transmission of price and price volatility in australian electricity spot market: a multivariance garch analysis. Energy Economics, 27:337(350), 2005. doi:10.1016/j.eneco.2003.11.002 An introduction to Australia's National Electricity Market, July 2009, http://www.aemo.com.au/corporate/0000-0262.pdf D. Brennan and J. Melanie, Market power in the autralian power market, Energy Economics, 20:121(133), 1998. doi:10.1016/S0140-9883(97)00010-8 M. Goto and G. Karolyi, Understanding Electricity Price Volatility within and across Markets, Working Paper Series 2004-12,2004. http://econpapers.repec.org/RePEc:ecl:ohidic:2004-12 H. Higgs, Price and volatility relationships in the Australian electricity market, PhD Thesis, submitted 2006, Queensland University of Technology. http://eprints.qut.edu.au/16404/ D. P. Kothari and I. J. Nagrath, Modern Power System Analysis, McGraw-Hill, 2008. ISBN 978-0-07-340455-4 F. Longstaff and A. Wang, Electricity Forward Prices: A High-Frequency Empirical Analysis, Journal of Finance, Vol. 59(4) Aug. 2004, pp.1877--1900. doi:10.1111/j.1540-6261.2004.00682.x H. Outhred, The competitive market for electricity in Australia: why it works so well, Proceedings of the 13rd International Conference on System Sciences, 2000. doi:10.1109/HICSS.2000.926760 S. Stoft, Power System Economics, John Wiley, New York, NY, 2002. http://au.wiley.com/WileyCDA/WileyTitle/productCd-0471150401.html F. A. Wolak, An empirical analysis of the impact of hedge contracts on bidding behavior in a competitive electricity market, Stanford University, 1999. doi:10.1080/10168730000000017

Reporting Bias and Information Discrepancy, and Consequences for Volatility in Financial Markets*

This paper presents an analytical explanation of price volatility and mispricing in a rational financial market. In the proposed model, specialists might have private interest in manipulating their reports, which can affect the security price. Additionally, traders differ in terms of both rationality and available information. The present study shows that mispricing and price volatility occurs in a rational financial market when specialist reports are incorporated under different trader types. Also analyzed are comparative statics of the magnitude of misreports, the informativeness of the price, and price volatility when the ratio of superior traders to ordinary traders changes. Both price volatility and the potential for extra profit gain by superior traders might increase when they are dominant.

The Test of IPO’s Underpricing between Financial and Non-Financial Institution Based on Asymmetric Information Hypothesis

This research aims to prove underpricing IPO differences between financial institution and non-financial institution during 2001-2008 period. In addition, this research also examined the causes of underpricing IPOs of financial institution and non-financial institution using asymmetric information hypothesis. This research uses initial return and abnormal return as a measure to know which one is better as an underpricing measurement. Furthermore, the calculation in this research is using the open to close prices data to have more accurate results and not biased. The tests are using one sample t-test, independent t-test, and the ordinary least square regression to analyze the data. One sample t-test is used to prove occurrence of institutions’ underpricing at observation period. Independent t-test is used to determine differences significance in underpricing. Whereas, ordinary least square regression to determine the causes of underpricing. Each test uses an initial return and abnormal return as a measure. This research found that IPOs are significantly underpriced at the first day of trading. Financial institutions sector’s IPOs are less underpriced than non-financial institutions sectors. This findings means that financial institution sector have less asymmetric information than non-financial institution sectors. This study concludes that the regulation and the monitoring for the financial institution sector have developed better than the previous few years. In addition, there are several factors that affect underpricing. These factors are the type of business entities and trade price volatility in the stock market. The usage of both initial return and abnormal return to measure underpricing level are not significantly different. Furthermore, usage of open to close price data is able to give more accurate results for calculations to measure underpricing level.

Market Belief, Trading Volume, Price Volatility, and Liquidity

This paper studies the effects of investors’ heterogeneous beliefs on the trading volume, price volatility, and liquidity of stocks. Following Kurz and Motolese (2008), we propose a simple theoretical model to show that the equilibrium stock price is linearly and positively correlated with market belief (investors’ average belief) about stock future payoffs. Further, it is shown in this paper that when market belief is more volatile, trading volume and liquidity decline while price volatility increases. Using the analyst forecast data on quarterly earnings per share provided by the Institutional Brokers’ Estimate System, we obtain empirical results which support the theoretically predicted relations between the volatility of market belief about stock future payoffs and the trading volume, price volatility, and liquidity of underlying stocks, and these empirical results are robust to various methods of estimating market belief and its volatility and to alternative illiquidity measures.

What can price volatility tell us about market efficiency? Conditional heteroscedasticity in historical commodity price series

The development in the working of markets has been an important topic in economic history for decades. The volatility of market prices is often used as an indicator of market efficiency in the broadest sense. Yet, the way in which volatility is estimated often makes it difficult to compare price volatility across regions or over time for two reasons. First, if prices are non-stationary, the variance is inflated. Second, the variance of commodity prices contains information on a number of region- and time-specific factors that are not related to market efficiency. Hence, the popular coefficient of variation and related indicators are not adequate measures of the efficiency of markets and are incomparable across regions. As a solution, we suggest using a conditional heteroscedasticity model to estimate the residual (conditional) variance of commodity prices. This measure reflects how markets react to unexpected events and can therefore be seen as a measure of market efficiency. Using this approach on grain prices from the Early Modern Pisa, Paris, Vienna, and Japan, we find that the residual price volatility had declined (and market efficiency increased) in the European markets in the late sixteenth century while it remained stable in Japan.