Showing papers on "Spot contract published in 2004"

Modeling electricity prices: jump diffusion and regime switching

Abstract: In this paper we address the issue of modeling spot electricity prices. After summarizing the stylized facts about spot electricity prices, we review a number of models proposed in the literature. Afterwards we fit a jump diffusion and a regime switching model to spot prices from the Nordic power exchange and discuss the pros and cons of each one.

Modeling highly volatile and seasonal markets: evidence from the Nord Pool electricity market

Abstract: In this paper we address the issue of modeling spot electricity prices. After analyzing factors leading to the unobservable in other financial or commodity markets price dynamics we propose a mean reverting jump diffusion model. We fit the model to data from the Nord Pool power exchange and find that it nearly duplicates the spot price’s main characteristics. The model can thus be used for risk management and pricing derivatives written on the spot electricity price.

The impact of coffee market reforms on producer prices and price transmission

Abstract: This paper evaluates the impact of coffee sector reforms during late 1980s and early 1990s on coffee growers in the main coffee producing countries. Earlier evidence suggests that the reforms increased the share of producer prices in the world price of coffee. This hypothesis is tested in the paper with the help of cointegration analysis, and the results show that in most countries the longterm producer price share has indeed increased substantially after the liberalization. Moreover, the results suggest that the reforms induced a closer cointegrating relationship between grower prices and world market prices. Finally, estimation of an error-correction model reveals that short-run transmission of price signals from the world market to domestic producers has improved, such that domestic prices adjust faster today to world price fluctuations than they did prior to the reforms. However, there is some evidence of asymmetries in the way positive and negative world price changes are transmitted to domestic markets.

The normal inverse gaussian distribution and spot price modelling in energy markets

Abstract: We model spot prices in energy markets with exponential non-Gaussian Ornstein–Uhlenbeck processes. We generalize the classical geometric Brownian motion and Schwartz' mean-reversion model by introducing Levy processes as the driving noise rather than Brownian motion. Instead of modelling the spot price dynamics as the solution of a stochastic differential equation with jumps, it is advantageous from a statistical point of view to model the price process directly. Imposing the normal inverse Gaussian distribution as the statistical model for the Levy increments, we obtain a superior fit compared to the Gaussian model when applied to spot price data from the oil and gas markets. We also discuss the problem of pricing forwards and options and outline how to find the market price of risk in an incomplete market.

Two-settlement Systems for Electricity Markets under Network Uncertainty and Market Power

Abstract: We analyze welfare and distributional properties of a two-settlement system consisting of a spot market over a two-node network and a single energy forward contract. We formulate and analyze several models which simulate joint dispatch of energy and transmission resources coordinated by a system operator. The spot market is subject to network uncertainty, which we model as a random capacity derating of an important transmission line. Using a duopoly model, we show that even for small probabilities of congestion (derating), forward trading may be substantially reduced, and the market power mitigating effect of forward markets (as shown in Allaz and Vila 1993) may be nullified to a great extent. There is a spot transmission charge reflecting transportation costs from location of generation to a designated hub whose price is the underlying for the forward contract. This alleviates some of the incentive problems associated with the forward market in which spot-market trading is residual. We find that the reduction in forward trading is due to the segregation of the markets in the constrained state, and the absence of natural incentives for generators to commit to more aggressive behavior in the spot market (the “strategic substitutes” effect). In our analysis, we find that the standard assumption of “no-arbitrage” across forward and spot markets leads to very little contract coverage, even for the case with no congestion. We present an alternative view of the market where limited intertemporal arbitrage enables temporal price discrimination by competing duopolists. In this framework, we assume that all of the demand shows up in the forward market (or that the market is cleared against an accurate forecast of the demand), and the forward price is determined using a “market clearing” condition.

Out-of-Sample Performance of Discrete-Time Spot Interest Rate Models

Abstract: We provide a comprehensive analysis of the out-of-sample performance of a wide variety of spot rate models in forecasting the probability density of future interest rates. Although the most parsimonious models perform best in forecasting the conditional mean of many financial time series, we find that the spot rate models that incorporate conditional heteroscedasticity and excess kurtosis or heavy tails have better density forecasts. Generalized autoregressive conditional heteroscedasticity significantly improves the modeling of the conditional variance and kurtosis, whereas regime switching and jumps improve the modeling of the marginal density of interest rates. Our analysis shows that the sophisticated spot rate models in the existing literature are important for applications involving density forecasts of interest rates.

Understanding Electricity Price Volatility Within and Across Markets

Abstract: This study analyzes how electricity price volatility evolves over time for different electricity trading hubs in several deregulated markets around the world. The goal is to uncover common features across hubs within each market in the daily spot price volatility processes related to seasonality, mean reversion, conditionally autoregressive heteroskedasticity (ARCH) and possibly time-dependent jumps. We apply our analysis to markets in U.S., Nord Pool, and Australia. We show that ARCH and time-dependent jumps are important statistical features of price volatility across all hubs in each market but with different levels of intensity. We also find that inferences about the role of seasonality components are sensitive to modeling of the ARCH and jump features.

Modeling Electricity Prices with Regime Switching Models

Abstract: We address the issue of modeling spot electricity prices with regime switching models. After reviewing the stylized facts about power markets we propose and fit various models to spot prices from the Nordic power exchange. Afterwards we assess their performance by comparing simulated and market prices.

Theory of Storage and the Pricing of Commodity Claims

Abstract: We extend the literature on commodity pricing by incorporating a link between the spread of forward prices and spot price volatility suggested by the theory of storage. Our model has closed form solutions that are generalizations of the two-factor model of Gibson–Schwartz (1990). We estimate the model on daily copper spot and forward prices using the Kalman filter methodology. Our findings confirm the link between the forward spread and volatility, but also show that the Gibson–Schwartz (1990) model prices forward contracts almost as well. In the pricing of option contracts, however, there are significant differences between the models.

The Unbiasedness Hypothesis in the Freight Forward Market: Evidence from Cointegration Tests

Abstract: The current paper investigates the unbiasedness hypothesis of Forward Freight Agreement (FFA) prices in the freight over-the-counter (OTC) forward market trades. Cointegration techniques are employed to examine the hypothesis. The results indicate that: FFA prices one and two months before maturity are unbiased predictors of the realised spot freight rates for all investigated shipping routes; three months FFA prices for panamax Pacific routes are unbiased predictors of spot prices, while FFA prices for panamax Atlantic routes are found to be biased predictors of spot prices. This diverse evidence suggests that the validity of the unbiasedness hypothesis depends on the specific characteristics of the market under investigation, the selected trading route and the time to maturity of the contract.

Over-the-Counter Forward Contracts and Spot Price Volatility in Shipping

Abstract: The purpose of the paper is to investigate the impact of the introduction of Forward Freight Agreement (FFA) trading on spot market price volatility in panamax 1, 1A, 2, and 2A trading routes of the dry-bulk shipping industry. The main concern about the impact of derivatives trading emanates from the results of studies that have found that the activities of speculators may destabilise (or stabilise) prices in the spot market. The proposed methodology is considering the link between volatility and information, and of possible asymmetric effects in the conditional volatilities. A GJR-GARCH (Glosten, et al., 1993) process is found to be the most appropriate specification. The results suggest that the onset of FFA trading has had (a) a stabilising impact on the spot price volatility in all investigated routes, (b) an impact on the asymmetry of volatility in routes 2 and 2A, and (c) substantially improved the quality and speed of information flow in routes 1, 1A and 2. However, after including in the conditional variance equation other explanatory variables that may affect spot volatility, the results indicate that only in voyage routes 1 and 2 the reduction in volatility may be a direct consequence of FFA trading. The results suggest that the introduction of FFA trading has not had a detrimental effect on the spot market. It appears that there has been an improvement in the way that information is transmitted into spot prices following the onset of FFA trading.

Over-the-counter forward contracts and spot price volatility in shipping

Abstract: The purpose of this paper is to investigate the impact of the introduction of Forward Freight Agreement (FFA) trading on spot market price volatility in two panamax Atlantic (1 and 1A) and two panamax Pacific (2 and 2A) trading routes of the dry-bulk shipping industry. The results suggest that the onset of FFA trading: (a) decreased spot price volatility in all investigated routes, (b) has had an impact on the asymmetry of volatility in Pacific routes, and (c) substantially improved the quality and speed of information flow in three out of the four investigated routes. After introducing control variables, that may affect price volatility, the results indicate that only in voyage routes may the reduction in volatility be a direct consequence of FFA trading. It seems that the introduction of FFA trading has not had a detrimental effect on the spot market, with an improvement in the way information is transmitted into spot prices following the onset of FFA trading.

Impact of banking and forward contracts on tradable permit markets

Abstract: This article assesses the effects of banking on tradable emission permit markets and, in particular, the role of uncertainty in permit markets that allow banking. In such markets, current and future spot trade markets are linked: An increase in uncertainty about future spot markets at first lowers spot prices due to the presence of unregulated agents but soon spurs an increase in spot prices.

12 Modeling Electricity Forward Curve Dynamics in the Nordic Market

Abstract: This chapter considers the modeling of electricity forward curve dynamics with parameterized volatility and correlation structures. We estimate the model parameters by using the Nordic market’s price data and show how the model can be implemented into everyday industry practice. Electricity markets are different from the usual financial markets and many other commodity markets due to the non-storability of electricity. The spot price of electricity is set by the shortterm supply‐demand equilibrium, and supply and demand must be in balance at each instance. Because the demand (supply) today does not necessarily have anything to do with the demand (supply) in the future, the spot electricity today is a different asset from the spot electricity in the future. This implies that the relation between the spot price and the forward prices in the electricity markets is not as straightforward as in the usual financial and commodity markets. In this chapter we develop a simple parameterized model for forward curve dynamics. We estimate the model parameters by using the data from the Nordic electricity market. The Nordic electricity market is hydro-dominated with roughly 50% of the electricity supply being hydrobased. The winters are cold and much of the precipitation comes as snow. In the spring the snow melts causing floods whose timing varies a lot from year to year due to the temperature. There is a significant electricity heating load while the mild summers do not require a lot of air conditioning, so that electricity demand is concentrated on the winter season. The timedependent variation present in the demand results in a seasonal, weekly and daily profile in the electricity spot price and electricity forward curve. However, these price variations are smoothed to some extent in the Nordic market because of the hydropower production. Some hydro producers have the possibility to optimize their discharge up to one year ahead, and many have the possibility for some months ahead. The short-term, i.e. intra-week and intraday, variations in the spot prices decrease due to the easily adjustable hydropower. On the other hand, there is high variation in the price level between different years because the total amount of

A Two-Factor Model for Commodity Prices and Futures Valuation

Abstract: This paper develops a new reduced form two-factor model for commodity spot prices and futures valuation. This models extends Schwartz's (1997) two-factor model by adding two new features. First we replace the Ornstein-Uhlenbeck process for the convenience yield by a Cox-Ingersoll-Ross (CIR) process. This ensures that our model is arbitrage free while Schwartz's model does not rule out arbitrage possibilities. Second, we introduce a time-varying volatility for the spot price process. In particular, we consider the spot price volatility is proportional to the square root of the convenience yield level. This implicitly implies that the spot price volatility depends on inventory levels of the commodity as predicted by the theory of storage. We empirically test both models using weekly crude oil futures data from 5th of March 1999 to the 15th of October 2003. In both cases, we estimate the model's parameters using the Kalman filter.

Coffee futures: role in reducing coffee producers' price risk

Abstract: The paper investigates whether coffee producers can benefit by taking coffee production/marketing decisions on the basis of coffee futures forecasts. The methodology employed is to match futures and spot prices for the coffee futures contract traded at the international commodity exchanges. Regression analysis demonstrates that changes in spot prices are not explained by changes in lagged futures prices. On the contrary, it emerges that futures prices tend to adapt to the prevailing spot prices. The deviations of the spot prices from the lagged futures prices are over 30 per cent on average and they do not follow any systematic pattern. Therefore, the hypothesis that coffee futures market information could benefit coffee producers cannot be empirically supported.

Method, system, and computer program product for trading diversified credit risk derivatives

Abstract: A method and apparatus for trading a standardised contract. The contract obliges the seller to make delivery to the exchange of a standardised debt product on the delivery date of the contract for a price given by the exchange determined settlement price and a conversion factor. The contract further requires to take delivery from the exchange of said debt obligation for the same price. The contract further requires the buyer or seller to make margin payments to the exchange on each trading day, or with a longer period, based on the price movements of the contract during that trading day or period if so required by the trading rules. The contract further obliges the exchange to make similar payments to the buyer or seller if they are entitled to such payments under the trading rules.

Understanding the Fine Structure of Electricity Prices

Abstract: This paper analyzes the special features of electricity spot prices derived from the physics of this commodity and from the economics of supply and demand in a market pool. Besides mean-reversion, a property they share with other commodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a jump-reversion component to properly represent these sharp upward moves shortly followed by drops of similar magnitude. Our approach allows to capture - for the first time to our knowledge - both the trajectorial and the statistical properties of electricity pool prices. The quality of the fitting is illustrated on a database of major US power markets.

Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology

Abstract: We model the properties of equilibrium spot and futures oil prices in a general equilibrium production economy with two goods. In our model production of the consumption good requires two inputs: the consumption good and a Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Equilibrium spot price behavior is determined as the shadow value of oil. The resulting equilibrium oil price exhibits mean-reversion and heteroscedasticity. Further, even though the state of the economy is fully described by a one-factor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regime-switching process, the regime being an investment `proximity' indicator. Further, our model captures many of the stylized facts of oil futures prices. The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously due to the productive value of oil as an input for production. This convenience yield is decreasing in the amount of oil available in the economy. We test out model using crude oil data from 1982 to 2003. We estimate a linear approximation of the equilibrium regime-shifting dynamics implied by our model. Our empirical specification successfully captures spot and futures data. Finally, the specific empirical implementation we use is designed to easily facilitate commodity derivative pricing that is common in two-factor reduced form pricing models.

An Econometrics Forecasting Model of Short Term Oil Spot Price

Abstract: This paper presents a short term quarterly forecasting model of WTI using OECD stocks, non-OECD demand and OPEC supply based on econometrics methodology. Levels of stocks include SPR and industrial are major measures of balance or imbalance in OECD oil market and OPEC supply is the most important leverage of managing oil price also non-OECD demand considered as a market indicator for this region. In this study the econometrics relationships between these variables was studied. Since the commercial stocks and SPR follow different objectives they have been studied separately. Then forecasting price model has developed based on lagged values of industrial inventory, non-OECD demand and OPEC supply. This model is mainly useful to the OPEC in investigating the impact of different production ceiling on the future oil prices.

Forecasting Commodity Prices: Futures Versus Judgment

Abstract: This paper assesses the performance of three types of commodity price forecasts--those based on judgment, those relying exclusively on historical price data, and those incorporating prices implied by commodity futures. For most of the 15 commodities in the sample, spot and futures prices appear to be nonstationary and to form a cointegrating relation. Spot prices tend to move toward futures prices over the long run, and error-correction models exploiting this feature produce more accurate forecasts. The analysis indicates that on the basis of statistical- and directional-accuracy measures, futures-based models yield better forecasts than historical-data-based models or judgment, especially at longer horizons.

The relationship between energy spot and futures prices: Evidence from the Australian electricity market

Abstract: This paper examines the relationship between futures and spot electricity prices for two of the Australian electricity regions in the National Electricity Market (NEM): namely, New South Wales and Victoria. A generalised autoregressive conditional heteroskedasticity (GARCH) model is used to identify the magnitude and significance of mean and volatility spillovers from the futures market to the spot market. The results indicate the presence of positive mean spillovers in the NSW market for peak and off-peak (base load) futures contracts and mean spillovers for the off-peak Victorian futures market. The large number of significant innovation and volatility spillovers between the futures and spot markets indicates the presence of strong ARCH and GARCH effects. Contrary to evidence from studies in North American electricity markets, the results also indicate that Australian electricity spot and futures prices are stationary.

Structure and stylized facts of a deregulated power market

Abstract: Dramatic changes to the structure of the power sector have taken place over the past few decades. The major structural change being the introduction of competitive markets and power exchanges. In this paper, we conduct a detailed empirical study of the statistical properties of the Nordic power (Nord Pool) spot market. The aim of this study is to identify so-called stylized facts of the market. We address the structure of the market, and in particular, describe in detail the spot price forming process (equilibrium point trading). A collection of stylized facts is identified and discussed for the hourly system spot price, based on the entire 12 year history of available Nord Pool data. In particular we analyze: seasonallity, weather effects, the human factor, return distributions, volatility, spikes, and mean-reversion (anticorrelation). The empirical study presented in this paper shed new light on the mechanisms, features and structures of these new commodity markets. The market features that distinguish them from more classic financial and commodity markets are pointed out.

The Behavior of Interest Rates

Abstract: The evidence in Fama and Bliss (1987) that forward interest rates forecast future spot interest rates for horizons beyond a year repeats in the out-of-sample 1986-2004 period. But the inference that this forecast power is due to mean reversion of the spot rate toward a constant expected value no longer seems valid. Instead, the predictability of the spot rate captured by forward raets seems to be due to mean reversion toward a time-varying expected value that is subject to a sequence of apparently permanent shocks that are on balance positive to mid-1981 and on balance negative thereafter.

Spot market clearing

Abstract: A spot market clearing house for clearing spot market trades. The spot market clearing house may receive data indicative of settlement for the spot market trades of a participant in a single spot market or in multiple spot markets. The data may include data indicative of initial settlement and data indicative of revised settlement amounts. The spot market clearing house may further determine performance bonds amounts based on daily exposures of the participant in the single spot market or multiple spot markets. The spot market clearing house may manage fund transfers to clear trades of the participant and to satisfy performance bond amounts.

Periodic Heteroskedastic RegARFIMA models for daily electricity spot prices

Abstract: Although the main interest in the modelling of electricity prices is often on volatility aspects, we argue that stochastic heteroskedastic behaviour in prices can only be modelled correctly when the conditional mean of the time series is properly modelled. In this paper we consider different periodic extensions of regression models with autoregressive fractionally integrated moving average disturbances for the analysis of daily spot prices of electricity. We show that day-of-the-week periodicity and long memory are important determinants for the dynamic modelling of the conditional mean of electricity spotprices. Once an effective description of the conditional mean of spot prices is empirically identified, focus can be directed towards volatility features of the time series.For the older electricity market of Nord Pool in Norway, it is found that a long memory model with periodic coefficients is required to model daily spot prices effectively. Further, strong evidence of conditional heteroskedasticity is found in the mean corrected Nord Pool series. For daily prices at three emerging electricity markets that we consider (APX in The Netherlands, EEX in Germany and Powernext in France) periodicity in the autoregressive coefficients is also established, but evidence of long memory is not found and existence of dynamic behaviour in the variance of the spot prices is less pronounced. The novel findings in this paper can have important consequences for the modelling and forecasting of mean and variance functions of spot prices for electricity and associated contingent assets.