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Showing papers on "Spot contract published in 2007"


Journal ArticleDOI
TL;DR: In this article, periodic extensions of dynamic long-memory regression models with autoregressive conditional heteroscedastic errors are considered for the analysis of daily electricity spot prices, and the parameters of the model with mean and variance specifications are estimated simultaneously by the method of approximate maximum likelihood.
Abstract: Novel periodic extensions of dynamic long-memory regression models with autoregressive conditional heteroscedastic errors are considered for the analysis of daily electricity spot prices. The parameters of the model with mean and variance specifications are estimated simultaneously by the method of approximate maximum likelihood. The methods are implemented for time series of 1,200–4,400 daily price observations in four European power markets. Apart from persistence, heteroscedasticity, and extreme observations in prices, a novel empirical finding is the importance of day-of-the-week periodicity in the autocovariance function of electricity spot prices. In particular, the very persistent daily log prices from the Nord Pool power exchange of Norway are effectively modeled by our framework, which is also extended with explanatory variables to capture supply-and-demand effects. The daily log prices of the other three electricity markets—EEX in Germany, Powernext in France, and APX in The Netherlands—are less...

286 citations


Journal ArticleDOI
TL;DR: In this paper, a mean-reverting model is proposed for the spot price dynamics of electricity which includes seasonality of the prices and spikes, and the dynamics are a sum of non-Gaussian Ornstein-Uhlenbeck processes with jump processes giving the normal variations and spike behaviour of prices.
Abstract: A mean‐reverting model is proposed for the spot price dynamics of electricity which includes seasonality of the prices and spikes. The dynamics is a sum of non‐Gaussian Ornstein–Uhlenbeck processes with jump processes giving the normal variations and spike behaviour of the prices. The amplitude and frequency of jumps may be seasonally dependent. The proposed dynamics ensures that spot prices are positive, and that the dynamics is simple enough to allow for analytical pricing of electricity forward and futures contracts. Electricity forward and futures contracts have the distinctive feature of delivery over a period rather than at a fixed point in time, which leads to quite complicated expressions when using the more traditional multiplicative models for spot price dynamics. In a simulation example it is demonstrated that the model seems to be sufficiently flexible to capture the observed dynamics of electricity spot prices. The pricing of European call and put options written on electricity forward contra...

274 citations


Journal ArticleDOI
TL;DR: In this article, the authors test the adequacy of various one-factor and two-factor models for electricity spot prices and find that the regime switching models clearly outperform its competitors in almost all respects.
Abstract: Using spot and futures price data from the German EEX Power market, we test the adequacy of various one-factor and two-factor models for electricity spot prices. The models are compared along two different dimensions: (1) We assess their ability to explain the major data characteristics and (2) the forecasting accuracy for expected future spot prices is analyzed. We find that the regime-switching models clearly outperform its competitors in almost all respects. The best results are obtained using a two-regime model with a Gaussian distribution in the spike regime. Furthermore, for short and medium-term periods our results underpin the frequently stated hypothesis that electricity futures quotes are consistently greater than the expected future spot, a situation which is denoted as contango.

228 citations


Journal ArticleDOI
TL;DR: In this article, the authors propose a model where wholesale electricity prices are explained by two state variables: demand and capacity, and derive analytical expressions to price forward contracts and to calculate the forward premium.
Abstract: We propose a model where wholesale electricity prices are explained by two state variables: demand and capacity. We derive analytical expressions to price forward contracts and to calculate the forward premium. We apply our model to the PJM, England and Wales, and Nord Pool markets. Our empirical findings indicate that volatility of demand is seasonal and that the market price of demand risk is also seasonal and positive, both of which exert an upward (seasonal) pressure on the price of forward contracts. We assume that both volatility of capacity and the market price of capacity risk are constant and find that, depending on the market and period under study, it could either exert an upward or downward pressure on forward prices. In all markets we find that the forward premium exhibits a seasonal pattern. During the months of high volatility of demand, forward contracts trade at a premium. During months of low volatility of demand, forwards can either trade at a relatively small premium or, even in some cases, at a discount, i.e. they exhibit a negative forward premium.

144 citations


Journal ArticleDOI
TL;DR: In this paper, the authors derived estimating equations from a model where individuals consume two classes of goods, and the degree of contract enforcement affects the transaction cost of trade in the two classes differentially.
Abstract: This paper derives estimating equations from a model where individuals consume two classes of goods, and the degree of contract enforcement affects the transaction cost of trade in the two classes of goods differentially. Empirically, using Rauch's classification, internationally traded goods are classified into differentiated goods and those possessing a reference price, with the presumption that contract enforcement issues are more important for the former. It is verified that the measures of contract enforcement affect the volume of trade in both types of goods, but the impact is larger for differentiated goods.

140 citations


Journal ArticleDOI
TL;DR: A strategic model is developed that allows endogenous price formation in an industrial spot market where supply chain participants have private information and shows that beyond a threshold level, the effect of increasing supply uncertainty, or decreasing either the demand uncertainty or the information asymmetry among the manufacturers, is to increase the percentage procured on the spot market and to decrease prices.
Abstract: In a variety of industries ranging from agriculture to electronics and oil, procurement takes place through a combination of bilateral fixed-price contracts and open market trading among supply chain participants, which allows them to improve supply chain performance by utilizing new demand and cost information. The strategic behavior of the participants in these markets interacts with the way fixed-price contracts are formulated and significantly affects supply chain efficiency. In this paper, we develop a strategic model that allows endogenous price formation in an industrial spot market where supply chain participants have private information. Utilizing the model, we analyze the equilibrium of a dynamic game between a single supplier and multiple manufacturers who first contract with the supplier at a fixed price and then trade on a spot market. We study how such trading affects supply chain performance and show that it does not eliminate fixed-price contracting even though the fixed price is determined under inferior information. We find that it reduces prices, increases the quantities produced, and improves supply chain profits and consumer surplus. However, depending on the information structure of the supply chain, spot trading may make either the supplier or the manufacturers worse off. Our results show how the informational regime affects the profitability of supply chain participants and the allocation of quantities between the procurement venues. We show that beyond a threshold level, the effect of increasing supply uncertainty, or decreasing either the demand uncertainty or the information asymmetry among the manufacturers, is to increase the percentage procured on the spot market as well as the overall quantity procured and sold, and to decrease prices. As the number of manufacturers increases, procurement shifts from fixed-price contracting to spot trading and in the limit, the supply chain is both fully coordinated and informationally efficient. We also show that in many cases, the supplier may gain strategic advantage by sharing some of her cost information with the manufacturers.

108 citations


Journal ArticleDOI
TL;DR: In this paper, the authors investigated the efficiency of the New York Mercantile Exchange (NYMEX) Division light sweet crude oil futures contract market during recent periods of extreme conditional volatility.
Abstract: This study investigates the efficiency of the New York Mercantile Exchange (NYMEX) Division light sweet crude oil futures contract market during recent periods of extreme conditional volatility. Crude oil futures contract prices are found to be cointegrated with spot prices and unbiased predictors of future spot prices, including the period prior to the onset of the Iraqi war and until the formation of the new Iraqi government in April 2005. Both futures and spot prices exhibit asymmetric volatility characteristics. Hedging performance is improved when asymmetries are accounted for. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:61–84, 2007

98 citations


Journal ArticleDOI
TL;DR: In this article, the authors propose a procedure for extracting a smooth implied instantaneous forward curve from market data, by modeling the forwards to include both a seasonal component and a noise component, and requiring the noise to have maximum smoothness over the term structure of forward prices.
Abstract: Several important new classes of derivative instruments, notably those related to weather and to electricity, have payoffs based on the average value of the underlying over some period of time. For electricity in the Nord Pool market, for example, actively traded contracts exist for a variety of partly overlapping averaging periods out several years into the future. Current market prices for such contracts inherently depend on the market9s projection of the future spot price of electricity over the averaging periods, i.e., instantaneous forward prices for the relevant time periods. But since these forward prices are not observable directly, and they can be expected to exhibit the seasonality embedded in the spot market, extracting a smooth implied instantaneous forward curve from market data is a challenging task. This article offers a procedure for doing just that, by modeling the forwards to include both a seasonal component and a noise component, and requiring the noise to have maximum smoothness over the term structure of forward prices.

94 citations


Journal ArticleDOI
TL;DR: In this paper, the authors proposed a systematic negotiation scheme through which a generator and load can reach a mutually beneficial and risk tolerable forward bilateral contract, either physical or financial, in mixed pool/bilateral electricity markets.
Abstract: In mixed pool/bilateral electricity markets, participants can sign forward bilateral contracts several months in advance of its delivery. In addition, generators may sell to and loads may buy from the pool at the spot price through the day-ahead or balancing markets. Forward bilateral contracts have the advantage of price predictability in comparison with the uncertain spot price. However, the risk is that such a contract commits the partners to a price that may be disadvantageous compared to the spot price. Here, we propose a systematic negotiation scheme through which a generator and load can reach a mutually beneficial and risk tolerable forward bilateral contract, either physical or financial. Under this approach, the generator and load respond rationally to a stream of bilateral bids/counter-bids and offers/counter-offers considering their respective benefits while accounting for the risks incurred by the prediction uncertainty in the pool spot price and other market parameters over the length of the contract. Each negotiating party can choose its own definition of risk which can be influenced by regret, value-at-risk or dispersion from the mean. Numerical tests show that this flexible negotiating approach can be readily put into practice

89 citations


Journal ArticleDOI
TL;DR: In this paper, extended models for estimating price developments on electricity markets are presented based on an ARMA model combination with GARCH, Gaussian-mixture and switching-regime approaches.

88 citations


Journal ArticleDOI
TL;DR: A forward cap increases firms’ incentives for forward contracting, whereas a spot cap reduces such incentives, and in both cases, more forward contracts are committed as the generation resource ownership structure becomes more diversified.

Journal ArticleDOI
TL;DR: In this paper, the authors consider the determination of an equilibrium forward contract on a non-storable commodity between two firms that have mean-variance preferences over their risky profits and negotiate the forward contract through a Nash bargaining process.
Abstract: Bilateral supply contracts are widely used despite the presence of spot markets. In this paper, we provide a potential explanation for this prevalence of supply contracts even when spot markets are liquid and without delivery lag. Specifically, we consider the determination of an equilibrium forward contract on a nonstorable commodity between two firms that have mean-variance preferences over their risky profits and negotiate the forward contract through a Nash bargaining process. We derive the unique equilibrium forward contract in closed form and provide an extensive analysis. We show that it is the risk-hedging benefit from a forward that justifies its prevalence in spite of liquid spot markets. In addition, while a forward does not affect production decisions due to the presence of spot markets, it does affect inventory decisions of the storable input factor due to its hedging effect against the inventory risk. We also show that price volatilities and correlations are important determinants of the equilibrium contract. In particular, the equilibrium forward price can be nonmonotonic in the spot price volatility and can decrease as the initial spot price increases.

Journal ArticleDOI
TL;DR: In this paper, the authors developed an oil price forecasting technique which is based on the present value model of rational commodity pricing and suggested shifting the forecasting problem to the marginal convenience yield, which can be derived from the cost-of-carry relationship.
Abstract: The paper develops an oil price forecasting technique which is based on the present value model of rational commodity pricing. The approach suggests shifting the forecasting problem to the marginal convenience yield, which can be derived from the cost-of-carry relationship. In a recursive out-of-sample analysis, forecast accuracy at horizons within one year is checked by the root mean squared error as well as the mean error and the frequency of a correct direction-of-change prediction. For all criteria employed, the proposed forecasting tool outperforms the approach of using futures prices as direct predictors of future spot prices. Vis-a-vis the random-walk model, it does not significantly improve forecast accuracy but provides valuable statements on the direction of change. Copyright © 2007 John Wiley & Sons, Ltd.

Journal ArticleDOI
TL;DR: In this paper, a reactive power spot price index (QSPI) has been suggested to determine the optimal location of static VAr compensator (SVC) in the power system.
Abstract: In this paper, a new reactive power spot price index (QSPI) has been suggested to determine the optimal location of static VAr compensator (SVC) in the power system. The proposed index has been computed at each bus based on the reactive power spot price under different loading conditions for the system intact and critical line outage contingency cases. The effectiveness of the proposed method has been tested on two practical Indian systems. The results show that the suggested method of SVC placement is effective in reducing the real and reactive power spot prices, generation cost, system real power loss, total wheeling charges, and enhancing the system loading margin during normal as well as critical contingency cases.

Posted Content
TL;DR: In this article, the information content of the difference between the forward and spot prices (the so-called forward premium) regarding the agents' decisions is analyzed, and it is shown that the sign of the ex-post forward premium depends on the unexpected variation in demand and on the expected variation in the hydro-energy capacity, and the ex ante forward premium varies with the expected demand in tight market conditions.
Abstract: Deregulation in energy markets has entailed important changes in the way agents conduct business. Price risk arises as a result of fluctuations in the future price of electricity and agents assume long or short positions in the forward and spot markets to hedge their exposure to price risk. The presence of forward risk premium in prices is an evidence of the fact that agents act in the market according to risk considerations. This work aims to analyse the information content of the difference between the forward and spot prices (the so-called forward premium) regarding the agents’ decisions. To do so, we adopt not only an ex post approach, but also an ex ante. We find that the sign of the ex post forward premium depends on the unexpected variation in demand and on the unexpected variation in the hydro-energy capacity, and that the ex ante forward premium varies with the expected demand in tight market conditions. We provide additional insights about relevant aspects of spot price pricing in the Spanish electricity market – such as the positive relation between spot price and CO2 emission allowance price or the (non) impact of the market reform introduced in the spot market in March 2006.

Journal ArticleDOI
TL;DR: In this article, the half-hourly spot price data from the New Zealand Electricity Market is used to reveal properties of electricity spot prices that cannot be captured by the statistical models, commonly used to model financial asset prices, that are increasingly used to predict electricity prices.
Abstract: We reveal properties of electricity spot prices that cannot be captured by the statistical models, commonly used to model financial asset prices, that are increasingly used to model electricity prices. Using more than eight years of half-hourly spot price data from the New Zealand Electricity Market, we find that the half-hourly trading periods fall naturally into five groups corresponding to the overnight off-peak, the morning peak, daytime off-peak, evening peak, and evening off-peak. The prices in different trading periods within each group are highly correlated with each other, yet the correlations between prices in different groups are lower. Models, adopted from the modelling of security prices, that are currently applied to electricity spot prices are incapable of capturing this behavior. We use a periodic autoregression to model prices instead, showing that shocks in the peak periods are larger and less persistent than those in off-peak periods, and that they often reappear in the following peak period. In contrast, shocks in the off-peak periods are smaller, more persistent, and die out (perhaps temporarily) during the peak periods. Current approaches to modelling spot prices cannot capture this behavior either.

Posted Content
TL;DR: A firm energy market for Colombia is presented: the ability to provide energy in a dry period - the product needed for reliability in Colombia's hydro-dominated electricity market.
Abstract: A firm energy market for Colombia is presented. Firm energy—the ability to provide energy in a dry period—is the product needed for reliability in Colombia’s hydro-dominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price. Since load is hedged from high spot prices, the market can rely on high prices to balance supply and demand during dry periods, rather than rationing.

Journal ArticleDOI
TL;DR: In this paper, the effect of TCSC on congestion and spot price in deregulated electricity markets is analyzed in a voluntary pool market, where the market participants can trade electricity either via a pool or through bilateral contracts.

Journal ArticleDOI
TL;DR: In this article, a double-auction scheme was proposed to reduce the network average transportation tariff by at least 14% in a transportation market where an O-D pair is operated roundtrip by multiple carriers, providing service to multiple shippers.
Abstract: In the recent years, new electronic procurement technologies have been successfully implemented in freight transportation marketplaces. This new type of trading between freight transportation agents requires new analytical tools to better understand the consequences of different strategies and forms of transportation capacity allocation. I studied two cases. First, a transportation market where an O–D pair is operated round-trip by multiple carriers, providing service to multiple shippers. Second, a multiple O–D pairs’ market, operated by multiple carriers, providing service to multiple shippers. In both cases the shippers’ demand function is elastic to the transportation service prices. The shippers contract each shipment to a single carrier following an open auction, in which the shipper selects the carrier based on the best bidding price. Carriers contracted to serve the shipments will often make empty movements to reposition their equipment. Hence, they will attempt to “generate” demand for these empty trips, in order to obtain revenue for their spare capacity. Carriers may generate demand for this capacity by offering service substantially below the market price (as low as the marginal cost of shipping). Shippers on the other hand, decide when to buy transportation services (and how much), i.e., the frequency of shipment and lot size, based on a strategy to minimize the total inventory and transportation costs. A significant reduction in the transportation tariff triggers an adjustment in the replenishment pattern of shippers, as a response to the beneficial market conditions. The new generated demand transforms shippers into bidders for the available spare capacity at discounted prices. This double-auction scheme allocates shipments to the otherwise unused capacity thus reducing the network’s empty movements, which also reduces the average transportation cost in the network. In this paper, I show that under an EOQ policy an average discount spot price of two thirds of the market price will trigger a demand generation for transportation services in the shippers’ pool. The paper presents a numerical application of the derived model, in which the double-auction scheme reduces the network average transportation tariff by at least 14%.

Journal ArticleDOI
TL;DR: In this article, the half-hourly spot price data from the New Zealand Electricity Market is used to reveal properties of electricity spot prices that cannot be captured by the statistical models, commonly used to model financial asset prices, that are increasingly used to predict electricity prices.

Posted Content
TL;DR: In this article, a two-country, two-period general equilibrium model of the spot and futures markets for crude oil is proposed, and it is shown that the negative of the basis may be viewed as an index of fluctuations in the price of crude oil driven by precautionary demand for oil.
Abstract: Based on a two-country, two-period general equilibrium model of the spot and futures markets for crude oil, we show that there is no theoretical support for the common view that oil futures prices are good predictors of the spot price in the mean-squared error sense; yet under certain conditions there is support for the view that oil futures prices are unbiased predictors. Our empirical analysis documents that futures-based forecasts are biased and typically inferior to simple and easy-to-use forecasting methods such as the no-change forecast. This does not mean that there is no useful information in oil futures prices. We demonstrate that fluctuations in the oil futures basis are larger and more persistent than fluctuations in the basis of foreign exchange futures. Within the context of our theoretical model, this anomaly can be explained by the marginal convenience yield of oil inventories. We show that increased uncertainty about future oil supply shortfalls causes the basis to decline and precautionary demand for crude oil to increase, resulting in an immediate increase in the real spot price that is not necessarily associated with an accumulation of oil inventories. Our main result is that the negative of the basis may be viewed as an index of fluctuations in the price of crude oil driven by precautionary demand for oil. Our empirical analysis of this index provides independent evidence of how shifts in market expectations about future oil supply shortfalls affect the spot price of crude oil. Such expectation shifts have been difficult to quantify, yet have been shown to play an important role in explaining oil price fluctuations. Our empirical results are consistent with related evidence in the literature obtained by alternative methodologies.

Journal ArticleDOI
TL;DR: In this paper, the authors construct forward price curves and value a class of two asset exchange options for energy commodities, and obtain closed form results for the forward prices in terms of elementary functions.
Abstract: In this article, we construct forward price curves and value a class of two asset exchange options for energy commodities. We model the spot prices using an affine two-factor mean-reverting process with and without jumps. Within this modeling framework, we obtain closed form results for the forward prices in terms of elementary functions. Through measure changes induced by the forward price process, we further obtain closed form pricing equations for spread options on the forward prices. For completeness, we address both an Actuarial and a risk-neutral approach to the valuation problem. Finally, we provide a calibration procedure and calibrate our model to the NYMEX Light Sweet Crude Oil spot and futures data, allowing us to extract the implied market prices of risk for this commodity.

Journal ArticleDOI
TL;DR: In this paper, the effect of the maturity of the futures contract used as the hedging instrument on the effectiveness of futures hedging was examined and it was shown that hedging is more effective when the near-month contract is used.
Abstract: This article examines the effect of the maturity of the futures conract used as the hedging instrument on the effectiveness of futures hedging. For this purpose, daily and monthly data on the West Texas Intermediate (WTI) crude oil futures and spot prices are used to work out the hedge ratios and the measures of hedging effectiveness resulting from using the near-month contract and those resulting from the use of a more distant (6-month) contract. The results show that futures hedging is more effective when the near-month contract is used. They also reveal that hedge ratios are lower for near-month hedging. Some explanations are presented for these findings.

Journal ArticleDOI
TL;DR: In this article, the pricing of electricity futures at the European Energy Exchange (EEX) over the period 2002 through 2004 was investigated, and a thorough empirical analysis by means of an out-of-sample test was conducted for both one-and two-factor models, incorporating a constant non-zero price of risk.
Abstract: This study investigates the pricing of electricity futures at the European Energy Exchange (EEX) over the period 2002 through 2004. To calculate theoretical contract values, the reduced-form models of J. J. Lucia and E. S. Schwartz (2002) are used, and a thorough empirical analysis by means of an out-of-sample test is conducted for both one- and two-factor models, incorporating a constant non-zero price of risk. Although the models are proven to capture all basic spot market characteristics and provide an accurate in-the-sample fit to observed futures prices, the forecasting performance is subject to biases. For instance, it was found that the relative mispricing depends on both the spot price level and the remaining time-to-maturity of the futures contracts. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:387–410, 2007

Journal ArticleDOI
TL;DR: In this paper, the authors analyzed the empirical determinants of contract length, a key and yet neglected dimension of contractual structure, and showed that both length and the compensation scheme are used to provide incentives within the same contract, joint analysis is important for a correct interpretation of the evidence.
Abstract: This paper analyzes the empirical determinants of contract length, a key and yet neglected dimension of contractual structure. I estimate contract length and contract type jointly using original data on tenancy agreements signed between 1870 and 1880 in the district of Siracusa, Italy. The findings indicate that the choice of contract length is driven by the need to provide incentives for nonobservable investment, taking into account transaction costs and imperfections in the credit markets that make incentive provision costly. The results also illustrate that because both length and the compensation scheme are used to provide incentives within the same contract, joint analysis is important for a correct interpretation of the evidence. (JEL: D82, O12, Q15)

Journal Article
TL;DR: In this paper, the lead-lag relationship between futures and spot markets in Greece was examined for both available stock index futures contracts of the Athens Derivatives Exchange (ADEX) and they employed a Bivariate GARCH model to explain price discovery of futures market over the crisis period 1999 to 2001.
Abstract: This paper examines the lead-lag relationship between futures and spot markets in Greece For both available stock index futures contracts (FTSE/ASE-20 and FTSE/ASE Mid 40) of the Athens Derivatives Exchange (ADEX), we employ a Bivariate GARCH model to explain price discovery of futures market over the crisis period 1999 to 2001 Empirical results confirm that futures market plays a price discovery role, implying that futures prices contain useful information about spot prices (in line with similar findings in the literature) These findings are helpful to financial managers and traders dealing with Greek stock index futures

Journal ArticleDOI
TL;DR: In this paper, a contract between an upstream and a downstream party consists of a contract price and a delivery requirement, and contract formation entails an externality that changes the probability distribution of the spot market price by removing high reservation price buyers and various sellers from the market.
Abstract: A contract between an upstream and a downstream party consists of a contract price and a delivery requirement. Contract formation entails an externality. It changes the probability distribution of the spot market price by removing high reservation price buyers and various sellers from the spot market. The first effect decreases the expected spot market price when the number of contracts is small, whereas the decrease in the number of sellers and additional residual contract demand increase the expected spot market price beyond a certain number of contracts. It implies an endogenous upper bound on the number of contracts. Contract prices are positively related to the number of contracts. Finally, additional contract formation reduces the variance of the spot market price when the number of contracts is sufficiently large.

Proceedings ArticleDOI
03 Jan 2007
TL;DR: In this article, a firm energy market for Colombia is presented, which coordinates investment in new resources to assure that sufficient firm energy is available in dry periods, and the market power is addressed directly: existing resources cannot impact the firm energy price.
Abstract: A firm energy market for Colombia is presented. Firm energy - the ability to provide energy in a dry period - is the product needed for reliability in Colombia's hydro-dominated electricity market. The firm energy market coordinates investment in new resources to assure that sufficient firm energy is available in dry periods. Load procures in an annual auction enough firm energy to cover its needs. The firm energy product includes both a financial call option and the physical capability to supply firm energy. The call option protects load from high spot prices and improves the performance of the spot market during scarcity. The market provides strong performance incentives through the spot energy price. Market power is addressed directly: existing resources cannot impact the firm energy price

Journal ArticleDOI
TL;DR: In this article, a multi-factor model for the joint dynamics of related commodity spot prices in continuous time is developed, where the co integrated behavior of the different spot price dynamics is explicitly taken into account.
Abstract: In this paper we develop a multi-factor model for the joint dynamics of related commodity spot prices in continuous time. We contribute to the existing literature by simultaneously considering various commodity markets in a single consistent model and show in an application the economic significance of our approach. The spot price processes are assumed to be characterized by the weighted sum of latent factors. Employing an essentially-affine model structure we allow for rich dependencies among the latent factors and thus, the commodity prices. The co integrated behavior of the different spot price dynamics is explicitly taken into account. Within this framework we derive closed-form solutions of futures prices and apply the Kalman Filter methodology to estimate the model for crude oil, heating oil and gasoline futures contracts traded on the NYMEX. Empirically, we are able to identify a common non-stationary equilibrium factor driving the long-term price behavior and stationary factors affecting all three markets in a common way. Additionally, we identify factors which only impact subsets of the commodities considered. To demonstrate the economic consequences of our integrated approach, we evaluate the investment into a refinery from a financial management perspective and compare the results with an approach neglecting the co-movement of prices. This negligence leads to radical changes in the project's assessment.

Journal ArticleDOI
TL;DR: By endogenizing the evolution of spot prices in response to buyers' and their supplier's actions, this research produces price fluctuations that exhibit significant autocorrelation in online business-to-business exchanges.
Abstract: We study how online business-to-business (B2B) exchanges affect buyer-supplier relationships where an exchange takes the role of a secondary market in which buyers (of the initial product) can trade excess inventory to address supply and demand imbalances. Over the last several years, B2B exchanges have attempted to provide supply for storable industrial goods with some degree of design specification (as opposed to undifferentiated commodities). Through this research, we elucidate some aspects of how speculative online exchanges with a small number of participants might behave and the impact they will have on the use of long-term contracts for supply. By endogenizing the evolution of spot prices in response to buyers' and their supplier's actions, we produce price fluctuations that exhibit significant autocorrelation in such markets. We show that participating buyers accrue network benefits as the number of participating firms increases through the inventory-pooling effects, resulting in reduced costs for them. However, a supplier acting strategically will counteract such benefits by restricting availability of goods to the spot market, sacrificing short-term spot-market revenue for long-term contract volume.