Spot Price Volatility Research Articles

Renewable energy regulation and structural breaks: An empirical analysis of Spanish electricity price volatility

Abstract International experience proves that electricity prices have undergone major changes in volatility since the entry of green technologies. The intermittency of renewable sources is one of the reasons for these changes, as it leads to higher volatility in periods of higher participation by renewables. We argue that the development of the regulatory system promoting renewable electricity also plays a crucial role. We raise a question that deserves attention: could an incentive scheme induce higher share of renewables and lower volatility simultaneously? In this paper, we conduct an empirical analysis with Spanish data. We analyze possible ensuing structural changes in Spanish electricity spot price volatility from January 2002 to December 2017. We identify two structural breaks linked to important measures related to renewable electricity: (i) the abolishment of the feed-in tariff scheme; and (ii) the establishment of a more market-oriented regulation based on investment and operating costs. We conclude that stable regulatory policies reduce volatility even though the presence of renewable sources is greater. Furthermore, market-based policy measures achieve lower volatility, encouraging good integration of intermittent renewable electricity.

Financialisation of natural resources & instability caused by risk transfer in commodity markets

Understanding the connectedness of financial markets and hence possible sources of systematic risk is central to the debate on the process of financialisation and its consequences for financial stability. In this study, we examine the connectedness between commodity spot and futures prices by applying a novel frequency connectedness framework on data from January 1979 to December 2019 to measure the connectedness among financial variables. Focusing on the seven most widely traded commodities, including gold, silver, crude oil (WTI and BRENT), corn, soya and iron, we find that (i) volatility of the commodity derivatives (futures) contribute to the spot volatility and hence influence spot prices of the underlying commodities in international markets (ii) volatility spillover effects are stronger in the first four days of the shock, suggesting that shocks to the underlying asset volatility caused by its own fundamental are more prevalent and persistent in the long-term (iii) commodities futures volatility transmission is higher than spot price volatility transmission to the futures prices. Our findings shed new light on the relationship between the actual spot price of commodities and their derivatives and have crucial socio-economic implications in terms of financialisation of important commodities.

The liquefied natural gas spot market and valuation of the rerouting option

The liquefied natural gas (LNG) market has experienced remarkable changes in the last few years, with long-term contracts being replaced by short-term ones and optionalities being granted by suppliers in the context of a large increase in natural gas production. Flexible LNG contracts give buyers the option to redirect their cargo if they identify a higher spot price at a point different from the original destination. The goal of this paper is twofold: (1) to describe the new outlook of LNG markets, which has become more and more spot-centric, with Asian LNG futures bringing transparency to spot and forward prices; and (2) to address the valuation of the rerouting option, a number that must be accounted for by the buyer when assessing the profitability of a given cargo. As an example, we apply the rerouting option valuation methodology to a scenario in which the supplier is the United States, the original destination is Germany and the alternative destination is Japan. We assume the rerouting of the vessel takes place when the cargo reaches the waters of Germany. This approach can be used for any group of three countries by adjusting the transportation costs. Our paper also depicts the value of the option as a function of the volatility of the natural gas spot prices in the alternative destination.

Законтрактованность региональных газовых рынков как фактор формирования цен на природный газ

Long-term contracts (LTCs) are the hallmarks of the European and Asian gas markets. The dominance of LTCs in international trade leads to their “gravity-center” function in relation to spot prices. When regional gas market is tight, spot prices reside above the LTCs prices. When market is loose they reside below the LTCs prices, but in any case LTCs’ prices serve as anchor for spot gas prices. Taking into account that all market imbalances are concentrated in the spot or non-contracted segment of the market, its prices are overreacting to even insignificant market imbalances. Size of the uncontracted segment thus plays an important role in price formation for natural gas as it becomes a self-sufficient factor determining the volume of demand. Overcontracting, which artificially downscales the size of demand in the uncontracted market segment, often causes a negative spread between spot and contracts price. The paper examines the role of this factor in price formation by measuring correlation between the size of the uncontracted segment and spot price formation. Concerning Europe, the research showed a nearly linear relationship between the LTCs to imports index for pipeline gas and spot/contract price spreads. Such a relationship allows to build up a regression model for forecasting the spot prices. In Asia, ovecontracting leads to high volatility of spot prices. Their dependence on the size of uncontracted segment fully reveals itself in the periods of seasonal picks of demand for natural gas.

Optimal Investment Strategy in Renewable Energy Technologies

This paper analyzes the energy manager's investment decision in renewable energy technologies in the presence of uncertain production volumes. In this model, we assume the energy manager to be a price taker who aims at minimizing the cost to cover the firm's electricity demand, by deciding upon the optimal level of investment in renewable self-generation facilities. We show, that the Reliability-based-planning paradigm'', where threshold on the demand coverage probability is imposed, leads to suboptimal renewable energy portfolios compared to the Balancing-cost-based-planning paradigm'', where the price of demand coverage violations is exogeneously fixed. We analyze the energy manager's optimal investment decision in renewables in the balancing-cost-based approach for two different types of the outside option, i.e. purchasing residual power (i) via pre-contracted energy at a fixed price or (ii) at the balancing market with a stochastic energy price. We find that the energy manager is reluctant to invest in renewable energy technologies, when the price of pre-contracted energy is below a critical threshold price, which itself decreases with decreasing prices of the investment goods. Moreover, the energy manager increases investment in renewables with increasing spot price volatility in order to hedge against spot price risk. In the presence of negative correlations between the power output and spot price, i.e. whenever there is a shortfall in the power supply energy prices tend to be higher, the energy manager's optimal decision is to increase (decrease) the optimal level of investment depending on weather the level of investment in the uncorrelated scenario is high (low).

Information in Electricity Forward Prices

We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

BitMEX bitcoin derivatives: Price discovery, informational efficiency, and hedging effectiveness

AbstractBitMEX is the largest unregulated bitcoin derivatives exchange, listing contracts suitable for leverage trading and hedging. Using minute‐by‐minute data, we examine its price discovery and hedging effectiveness. We find that BitMEX derivatives lead prices on major bitcoin spot exchanges. Bid–ask spreads, interexchange spreads, and relative trading volumes are important determinants of price discovery. Further analysis shows that BitMEX derivatives have positive net spillover effects, are informationally more efficient than bitcoin spot prices, and serve as effective hedges against spot price volatility. Our evidence suggests that regulators prioritize the investigation of the legitimacy of BitMEX and its contracts.

Do the Islamic Stock Market Returns Respond Differently to the Realized and Implied Volatility of Oil Prices? Evidence from the Time–Frequency Analysis

ABSTRACT This paper makes an initial attempt to investigate the responsiveness of the Islamic stock market returns to the realized and implied volatility of oil prices at different investment horizons. The CBOE crude oil volatility index (OVX) is used for the implied volatility of oil price. The data are weekly from May 2007 to May 2017. The wavelet coherence analysis indicates that the negative effect of the implied volatility of oil price on Islamic stock market returns is more persistent compared to that of realized volatility across both time and scales. This finding tends to indicate that the Islamic stock market returns are more sensitive to the implied volatility of oil price compared to that of realized volatility. This may be due to the implied volatility, unlike the realized volatility, containing information of both historical volatility of oil spot prices and also predicted volatility. The results are plausible and have strong policy implications.

On the Brazilian fuel pricing policy: a Gaussian factor model approach

ABSTRACTIn this paper we investigate the oil spot price dynamics and volatility in Brazilian Reais (the local currency). The current policy on price adjustments of refined products caused enormous turmoil in May 2018 due to a trucking strike over high diesel prices. The current price adjustments follow variations of oil prices and exchange rate. This issue opens a discussion of the price transfers of imported oil products. The classic volatility analysis is difficult to carry out because price series in local currency are based on data with non-homogeneous frequency. We use a Gaussian factor model to estimate the oil spot price and then follow two different theoretical approaches to infer the dynamics and volatility in local currency. From these approaches, one can infer how high the volatility is compared to the first future contract taken as a benchmark. Furthermore, one can also monitor the short-term price forecasts once the conditional distribution is known from the dynamics established. This analysis can be applied to any type of refined product depending on the existence of a liquid term structure of future prices.

Optimal risk management problem of natural resources: application to oil drilling

The aim of this paper is to determine the optimal balance between extraction and storage of a natural resource (in particular crude oil) over time under a large array of environmental, operational and financial constraints for an infinite maturity time. We consider a manager that owns an oil field from which he can extract oil and decides to sell or store it. This operational strategy has to be carried out in continuous time and has to satisfy physical, operational, environmental and financial constraints such as storage capacity, crude oil spot price volatility, amount available for possible extraction or maximum amount that could be invested at time t for the extraction choice. The costs of storage and extraction are also taken into account to better fit the real market scenario. We solve the optimization problem of the manager’s profit under this large array of constraints and provide an optimal strategy. We then examine different numerical scenarios to check the robustness and the corresponding optimal strategies given by our model, which is obtained by a numerical approach, with respect to different possible events related to the market, environmental policies or ecological constraints.

The merit order effect of wind and river type hydroelectricity generation on Turkish electricity prices

The environmental concerns and dependency on gas imports push Turkish policy makers to find ways of increasing the share of renewable sources in electricity generation. Providing incentives for renewable energy in the form of feed-in-tariffs is one of the measures to achieve this goal. Basing on the data of Turkish electricity market operator, we quantified the magnitude of the price effects of wind and river type hydro generations on hourly average of day-ahead prices. We find that wind and river type hydro plants reduced the spot electricity prices during the period of 2012–2017, and despite these resources get the same incentives, their impacts on the spot prices and price volatility are different: this can be useful for a more comprehensive cost benefit analysis aimed at differentiating incentive schemes. The paper also discusses possible underlying reasons of these different impacts such as high seasonality of hydro generation and volatility of wind generation. Finally, we show that, assuming more than 75% of the price reductions were reflected into the consumer prices in Turkey, the net impact of wind and river type hydro generation on final consumer prices would be negative. This finding contributes to the discussions on renewable energy incentive mechanisms.

The Lead–Lag Relationship Between Futures and Spot Price—A Case of the Oil and Oilseed Contracts Traded on Indian Exchange

In India, government intervention in the agricultural derivatives market has not allowed the market to grow and become an important tool of risk management. It has always been argued that the farmers and consumers of crops in India primarily operate in the spot market, and their expectations about the future market conditions are likely to be reflected in the spot price movements. If the farmers and consumers of the crops do not participate in the derivatives market, it is not expected to work as an efficient tool of information dissemination on the underlying commodity. We analysed the role played by the futures market in the price discovery process in this article. To test whether the futures or spot market in India plays a dominant role in information dissemination, we have done a regression analysis considering the lagged futures and spot price volatility as explanatory variables. We consider the major oil and oilseed contracts traded on National Commodity and Derivatives Exchange. As the uses of many of the oilseeds are related, we have tried to analyse the interlinkages among the market for different commodities. Our results clearly show that information on relevant futures market volatilities help significantly to assess the volatility in the spot markets. This linkage can be leveraged to manage the spot market risks better. JEL: G10, G13, G14

Effects of downstream entry in a supply chain with a spot market

This article contributes to research at the interface of marketing, operations, and risk management by investigating the effects of downstream entry in a two-echelon supply chain with risk-averse supply chain members and a liquid spot market for trading intermediate goods. We find that at downstream entry, the upstream supplier may decrease the contract price of the intermediate goods to balance its risk-free utility from the contract channel and its risky utility from the spot market; correspondingly, downstream manufacturers may increase their contract quantities. As a result, downstream entry may hurt the supplier and benefit the incumbent manufacturers. We also identify situations where downstream entry can lead to a “win-win-win” situation, where the supplier, incumbent manufacturers, and final product consumers all benefit from downstream entry. Furthermore, when spot price volatility is high, the supplier may engage in speculative trading, but downstream entry discourages this speculative behavior. We conclude that these results are driven by the combined effects of spot trading and the risk attitudes of supply chain members. Specifically, the effects of downstream entry are dramatically affected by the risk attitude of manufacturers, but only slightly affected by that of the supplier. Finally, we find that the main results hold when the supplier’s capacity level is endogenous.

Analyzing the economic sources of oil price volatility: An out-of-sample perspective

The determinants of oil price changes have been extensively investigated in the literature. However, the economic source of its volatility receives much less attention in existing studies. In this paper, we investigate the predictive ability of macroeconomic variables to oil spot price volatility. Using a variety of predictive regressions, we find that some variables such as lagged oil production uncertainty and futures price volatility have significant effects on current oil volatility in-sample. However, adding any predictor to the autoregressive model cannot consistently improve the predictive ability from the out-of-sample perspective. We find the strong and significant predictability using forecast combinations. The revealed predictability is further demonstrated to be robust to the change of lag order and an alternative evaluation criterion of success ratio. Combination methods can provide more accurate density forecasts of realized volatility than the benchmark model.

Spot and reserve market equilibria and the influence of new reserve market participants

There is a broad consensus that the energy transition planned in Europe demands a sufficient number of flexibility providers. This contribution proposes to analyse effects of reserve flexibility from CHP, encompassing both the price effects on spot and secondary reserve markets in an endogenous market equilibrium model. Through the analysis of contrasting cases it highlights how the specific nature of CHP plants, and in particular their heat restrictions, lower the cost at which they contribute to the reserve and spot markets due to implied must-run conditions. A somewhat stylized fundamental market model based on input data for Germany in 2016 is used to analyse the price effects of reserve flexibility from Combined Heat and Power (CHP) entering both markets.Additionally, the impact of changes in the reserve market auction design in Germany is investigated. From June 2018 on, secondary reserve in Germany is auctioned in four-hour tenders, instead of the previous weekly peak/off-peak auction design. We therefore compare the results under such an alternative auction regime with the same demand.Our approach leads to spot prices at a similar mean level compared to historical data, with Mean Absolute Error (MAE) values in a range from 6.0 to 6.6 €/MWh for all cases. The reserve price levels in this approach also compare to mean historical price levels, yielding MAE values in the range of 2.6–7.1 €/MW/h for positive, and 0.8–2.2 €/MW/h for negative reserves. The price lowering effect of flexibility provision from CHP is clearly identifiable, underscoring the importance of explicit modelling of heat demand restrictions. A change of the reserve tender regime towards 4-hour tenders further lowers positive reserve prices in all cases. Finally, a short-term future scenario of the German power sector is investigated, in order to estimate the development of reserve markets with current market developments, finding that in the short-term future, price-lowering effects from CHP are likely to be overcompensated by higher spot price volatility due to rising fuel and emission prices.

The Impact of Futures Price Volatility to Spot Market : Case of Coffee in Indonesia

Indonesia is the world 4th largest coffee producer after Brazil, Vietnam and Colombia with export potential and higher national consumption concluded in 2017 while the coffee production was relatively stagnant. This was led the producer to not only the production risk but also the price risk which then emphasize the importance of futures markets existence as price risk management. This study is performed to examine the impact of futures price volatility to spot market using ARCH-GARCH toward primary data of coffee futures and spot prices of 1172 trading days starting from January 2014 to June 2018. The ARCH-GARCH analysis result indicates that futures price volatility and monetary variables are impacting the volatility of spot price. Arabica spot price volatility is impacted by volatility of Arabica futures price, inflation and exchange rate while Robusta spot price is impacted by Robusta futures price volatility and exchange rate. This is confirming that futures market plays dominant role in spot price discovery. Local futures and spot prices are also found to be significantly influenced by volatility of offshore futures prices which indicates that emerging country futures market is actually influenced by offshore futures market which the price itself used as price reference.

Price Discovery in Bitcoin Futures: Evidence From BitMEX

BitMEX is the largest unregulated bitcoin derivatives exchange, listing contracts suitable for leverage trading and hedging. Using minute-by-minute data, we examine its price discovery and hedging effectiveness. We find that BitMEX derivatives lead prices on major bitcoin spot exchanges. Bid-ask spreads, inter-exchange spreads and relative trading volumes are important determinants of price discovery. Further analysis shows that BitMEX derivatives have positive net spillover effects, are informationally more efficient than bitcoin spot prices, and serve as effective hedges against spot price volatility. Our evidence suggests that regulators prioritise investigation of the legitimacy of BitMEX and its contracts.

Exploring The Effect of Physical Delivery verses Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

This study emphasizes that either physical delivery or cash settlement method for futures contract is better for precious metal such as gold and the storable commodities like rice, wheat, sugar, as well as check the effect of both settlement method on the volatility of futures and spot price, to examine this issue we use bivariate GARCH model to discover the interaction between the spot price return and futures price return, the result shows basis variability of spot price and futures prices returns was substantially reduced in the case of physical delivery as compare to the cash settlement of same commodities, which means the physical delivery is more reliable for the rice, wheat, sugar, and gold futures contracts. In addition physical delivery settlement method is more better than the cash settlement because it cover the gap of demand and supply in the market which effect on price and the physical delivery method is more reliable, as it restrict the liquidation of futures contact which decline the price and provide the social benefit as well.

Exploring the Effect of Physical Delivery V/S Cash Settled Futures Contracts with the Prospective of Obligatory Delivery in Islamic Contract of Sales

This study emphasizes that either physical delivery or cash settlement method for futures contract is better for precious metal such as gold and the storable commodities like rice, wheat, sugar, as well as check the effect of both settlement method on the volatility of futures and spot price. To examine the issue we use bivariate GARCH model to discover the interaction between the spot price return and futures price return. The result shows basis variability of spot price and futures prices returns was substantially reduced in the case of physical delivery as compare to the cash settlement of same commodities, which means the physical delivery is more reliable for the rice, wheat, sugar, and gold futures contracts. In addition, physical delivery settlement method is better than the cash settlement because it covers the gap of demand and supply in the market which effect on price and the physical delivery method is more reliable, as it restricts the liquidation of futures contact which declines the price and provide the social benefit as well.

Drivers of electricity price dynamics: Comparative analysis of spot and futures markets

Against the backdrop of numerous evidence that variable renewable generation decreases electricity prices and increases price volatility, this paper assesses the drivers of electricity prices in spot and futures markets, focusing on the German electricity markets. We take into account nonlinearities in electricity prices by means of structural breaks and threshold regressions. We find that short-run and medium/long-run price drivers differ and, more importantly, that they vary over time. In the case of the spot market, the determinants of prices are renewable infeed and electricity demand, while in the futures market the main drivers are natural gas, coal and carbon prices. Our results give relevant insights for market participants who seek to optimize procurement/selling strategies in the spot market, and use the futures market to hedge against spot price volatility, which has increased due to a higher renewable generation.