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Spot contract
About: Spot contract is a research topic. Over the lifetime, 3437 publications have been published within this topic receiving 91599 citations.
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TL;DR: In this paper, two alternative ways of modelling the stochastic nature of the time charter equivalent spot rate in the market for Very Large Crude Carriers (VLCC) are presented.
Abstract: In this paper two alternative ways of modelling the stochastic nature of the time charter equivalent spot rate in the market for Very Large Crude Carriers (VLCC) are presented. It has been proposed that the freight rate follows an Ornstein-Uhlenbeck process. We follow up this approach of relating uncertainty directly to the rate process itself by suggesting a geometric mean reversion process. Empirical findings are presented. Then we address the question of valuing a VLCC. Due to the presence of uncertainty, flexibility to choose operation policy influences the value. We focus on lay up and scrapping as alternatives to spot operation. The option to lay up is relatively more important for a new vessel than for an old one, whereas the option to scrap becomes relatively more valuable as the vessel gets older.
80 citations
TL;DR: The authors provided 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 and found that the most parsimonious models perform best in forecasting conditional mean of many financial time series, while the models that incorporate conditional heteroscedasticity and excess kurtosis or heavy tails have better density forecasts.
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.
80 citations
TL;DR: In this article, the authors investigated the nature of convenience yields for CO2 emission allowance futures and concluded that a high fraction of the yields can be explained by the price level and volatility of the spot prices.
Abstract: In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation.Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of convenience yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant convenience yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the yields can be explained by the price level and volatility of the spot prices. We conclude that the yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.
80 citations
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TL;DR: A method that greatly reduces the computational burden induced by the introduction of independent regimes and performs a simulation study to test its efficiency is proposed.
Abstract: In this paper we discuss the calibration of models built on mean-reverting processes combined with Markov regime-switching (MRS). We propose a method that greatly reduces the computational burden induced by the introduction of independent regimes and perform a simulation study to test its efficiency. Our method allows for a 100 to over 1000 times faster calibration than in case of a competing approach utilizing probabilities of the last 10 observations. It is also more general and admits any value of gamma in the base regime dynamics. Since the motivation for this research comes from a recent stream of literature in energy economics, we apply the new method to sample series of electricity spot prices from the German EEX and Australian NSW markets. The proposed MRS models fit these datasets well and replicate the major stylized facts of electricity spot price dynamics.
80 citations
TL;DR: In this article, the authors developed a framework to value European-style options that are consistent with the possibility of market spikes, based on a regime jump model that disentangles mean-reversion from the spikes.
Abstract: Electricity prices are known to be very volatile and subject to frequent jumps due to system breakdown, demand shocks, and inelastic supply. Appropriate pricing, portfolio, and risk management models should incorporate these spikes. We develop a framework to value European-style options that are consistent with the possibility of market spikes. The valuation framework is based on a regime jump model that disentangles mean-reversion from the spikes. In the model the spikes are truly time-specific events and therefore independent from the mean-reverting price process. This closely resembles the true characteristics of electricity prices, as we show with Dutch APX spot price data in the period January 2001 till June 2002. Thanks to the independence of the two price processes in the model, we break derivative prices down in a mean-reverting value and a spike value. We use this result to show how the model can be made consistent with forward prices in the market and present closed-form formulas for European-style options.
79 citations