Cross‐hedging and forward‐contract pricing of electricity in the Pacific Northwest

This paper develops a linear regression model for using actively traded NYMEX natural gas futures as a cross‐hedge against electricity spot‐price risk in the Pacific Northwest and for pricing the forward contracts in the presence of temperature and hydro risks. Our approach comports with reality and provides power purchasers with an effective instrument through which they can hedge their electricity bets through natural gas futures. It also demonstrates the sharp month‐to‐month variations in the natural gas futures' optimal hedge ratios and hedge effectiveness. Finally, it finds significant risk premiums in the Pacific Northwest forward prices, supporting the hypothesis that forward‐contract buyers are relatively more risk‐averse than sellers. Copyright © 2011 John Wiley & Sons, Ltd.     

Price discovery in the Indian gold futures market

This paper examines the price discovery process of the nascent gold futures contracts in the Multi Commodity Exchange of India (MCX) over the period 2003 to 2007. The study employs vector error correction models (VECMs) to show that futures prices of both standard and mini contracts lead spot price. We find that mini contracts contribute to over 30% of price discovery in gold futures trade even though they account for only 2% of trading value on the MCX. Our finding reveals that trades initiated in mini contracts are much more informative than what the size of their market share of volume suggests.     

THE ECONOMIC THEORY OF VERTICAL RESTRAINTS

Abstract.  The types of contracts arising in a typical vertical manufacturer–retailer relationship are more sophisticated than a simple uniform price. In addition to setting per unit prices, manufacturers and retailers also revert to non-linear pricing and non-price instruments. These instruments or contracts are referred to as vertical restraints and can take the form of franchise fees, resale-price maintenance, exclusive dealing, exclusive territories and slotting allowances. The use and the effects of one type of instrument versus another depend crucially on specific market assumptions upstream and downstream and on the division of bargaining power between manufacturers and retailers. This paper surveys the industrial organization literature on retail pricing and shows that vertical restraint instruments have important effects on producer and consumer prices, market structure, efficiency and welfare.     

On Modelling Speculative Prices: The Empirical Literature

Traditionally, financial theory and in particular asset pricing models have assumed (implicitly or explicitly) a certain probabilistic structure for speculative prices. The probabilistic structure is usually defined in terms of specific statistical models and relates to the dependence, heterogeneity and the distribution of such prices. The primary objective of this paper is to trace the development of various statistical models proposed since Bachelier (1900), in an attempt to assess how well these models capture the empirical regularities exhibited by data on speculative prices.     

S&P 500 futures market and the normal backwardation hypothesis

This paper examines the behavior of near term S&P 500 index futures contract prices in the context of the theory of normal backwardation. Daily S&P 500 futures prices for 41 contracts over the 1982–1992 period are examined. There is no evidence that S&P 500 futures prices are biased estimates of the expected future spot price on expiration. Daily futures prices usually lie below the expected future spot price on expiration and usually rise over the contract period, but these price movements are not statistically significant. The surprising result of this study is the number of observations where backwardation appears not to hold. Furthermore, changes in the U.S. dollar exchange rates, the Tax Reform Act of 1986 and the switching of S&P 500 contracts quarterly expiration day had no significant effect on the behavior of S&P 500 futures prices.     

我国碳排放权期货产品开发研究

目前,国际碳交易市场定价权和碳计价结算货币主导权的缺失成为我国无论是在政府层面、学术领域还是实践方面,都是倍感担忧的问题。争夺碳交易定价权与推进人民币国际化有着重要的联系,两者之间可以构建一个重要的国家金融战略予以实施,其中适时推出CERs期货是该战略的重心。本文通过比较分析国外CERs期货合约设计的异同点及其对交易运行的影响,结合我国实际和市场特点,探讨了中国CERs标准期货合约的设计,并提出了我国发展碳排放权期货的战略目标、路径选择和政策建议。     

Multimarket Contact and Price Coordination in the Cellular Telephone Industry

Empirical studies have confirmed the prediction of theoretical models that contact in multiple markets may enhance firms' abilities to tacitly collude and consequently achieve higher prices and profits. It has remained largely unexplored, however, how firms coordinate their actions. This paper identifies a method of pricing in the cellular telephone industry that seems to enable firms to coordinate their actions across markets. This pricing pattern is found to raise prices by approximately 7–10%, and cannot be attributed to a variety of noncooperative explanations.     

Excess co-movement of agricultural futures prices: Perspective from contagious investor sentiment

This study investigates the excess co-movement of agricultural futures prices from a new perspective of contagious investor sentiment. This study shows that contagious investor sentiment is a key determinant of excess co-movement of agricultural futures prices, by using contagious investor sentiment among different agricultural futures. Further, this study decomposes contagious investor sentiment into expected and unexpected contagious investor sentiment. Results show that both of them can positively affect excess co-movement of agricultural futures prices. More interestingly, expected contagious investor sentiment outperforms unexpected contagious investor sentiment in soybean 1 future, soymeal future, and strong wheat future. In general, the results of this study can provide strong support for the significant roles of contagious investor sentiment in asset pricing applications.     

Some Recent Developments in Futures Hedging

The use of futures contracts as a hedging instrument has been the focus of much research. At the theoretical level, an optimal hedge strategy is traditionally based on the expected–utility maximization paradigm. A simplification of this paradigm leads to the minimum–variance criterion. Although this paradigm is quite well accepted, alternative approaches have been sought. At the empirical level, research on futures hedging has benefited from the recent developments in the econometrics literature. Much research has been done on improving the estimation of the optimal hedge ratio. As more is known about the statistical properties of financial time series, more sophisticated estimation methods are proposed. In this survey we review some recent developments in futures hedging. We delineate the theoretical underpinning of various methods and discuss the econometric implementation of the methods.     

Electricity derivatives pricing with forward-looking information

In order to increase overall transparency on key operational information, power transmission system operators publish an increasing amount of fundamental data, including forecasts of electricity demand and available capacity. We employ a fundamental model for electricity prices which lends itself well to integrating such forecasts, while retaining ease of implementation and tractability to allow for analytic derivatives pricing formulae. In an extensive futures pricing study, the pricing performance of our model is shown to further improve based on the inclusion of electricity demand and capacity forecasts, thus confirming the general importance of forward-looking information for electricity derivatives pricing. However, we also find that the usefulness of integrating forecast data into the pricing approach is primarily limited to those periods during which electricity prices are highly sensitive to demand or available capacity, whereas the impact is less visible when fuel prices are the primary underlying driver to prices instead.     

Thin trading and mispricing profit opportunities in the Canadian commodity futures

This study examines whether thin trading problems in the Canadian futures market can create mispricing profit opportunities for canola and feed wheat futures traded over the period 1981 through 1993. A forecasting model is developed using historical and publicly available information to predict futures closing prices for these contracts, then two trading rules (a confidence interval and a percentage price change filter) are used to determine their profit potentials. The size of profits generated from trading canola futures under either rule during the period 1987–1993 is consistent with C. Carter's (1989) earlier results that no market inefficiency was detected during the 1980–1987 period. Similarly, profits from the Canadian feed wheat thinly traded contracts and from a control group using the highly-liquid American soybean oil and wheat contracts do not violate the efficiency theory. The average gross profit per trade analysis further suggests that net positive profits may not be viable for marginal investors.     

Volatility of exchange rate futures and high-low price spreads

This study explores the time-series behavior and the predictability of daily percentage changes in the Japanese Yen futures contracts. The relationship between currency futures volatility and high-low price spreads in the Japanese Yen futures contracts is examined. In addition, this study explores the issue of first- and second-order dependencies in the Japanese Yen futures contract prices changes, address the issue of asymmetric volatility, and examine the extent to which the information contained in the high-low price spreads can be used to predict future Japanese Yen currency futures contract price changes. The analysis is carried out using the EGARCH model. The volatility of the Japanese Yen currency futures price changes is adequately modeled by an EGARCH process and is predictable using information contained in the high-low price spread variables constructed in this study. This study also finds a positive and significant relationship between the spread variable and the conditional mean of price changes, suggesting that current information contained in the spread variable can be used to predict future Japanese Yen currency futures contract price changes. The hypothesis that volatility is an asymmetric function of past innovations is confirmed.     

Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem

This paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model. Prices of lumber derivatives are used to calibrate a regime switching model, with each of two regimes characterized by a different mean reverting process. A single regime, mean reverting process is also calibrated. The value of a representative stand of trees and optimal harvesting prices are determined by specifying a Hamilton-Jacobi-Bellman Variational Inequality, which is solved for both pricing models using a implicit finite difference approach. The regime switching model is found to more closely match the behavior of futures prices than the single regime model. In addition, analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models.     

Pure jump models for pricing and hedging VIX derivatives

Recent non-parametric statistical analysis of high-frequency VIX data (Todorov and Tauchen, 2011) reveals that VIX dynamics is a pure jump semimartingale with infinite jump activity and infinite variation. To our best knowledge, existing models in the literature for pricing and hedging VIX derivatives do not have these features. This paper fills this gap by developing a novel class of parsimonious pure jump models with such features for VIX based on the additive time change technique proposed in Li et al., 2016a, Li et al., 2016b. We time change the 3/2 diffusion by a class of additive subordinators with infinite activity, yielding pure jump Markov semimartingales with infinite activity and infinite variation. These processes have time and state dependent jumps that are mean reverting and are able to capture stylized features of VIX. Our models take the initial term structure of VIX futures as input and are analytically tractable for pricing VIX futures and European options via eigenfunction expansions. Through calibration exercises, we show that our model is able to achieve excellent fit for the VIX implied volatility surface which typically exhibits very steep skews. Comparison to two other models in terms of calibration reveals that our model performs better both in-sample and out-of-sample. We explain the ability of our model to fit the volatility surface by evaluating the matching of moments implied from market VIX option prices. To hedge VIX options, we develop a dynamic strategy which minimizes instantaneous jump risk at each rebalancing time while controlling transaction cost. Its effectiveness is demonstrated through a simulation study on hedging Bermudan style VIX options.     

Partially overlapping time series: a new model for volatility dynamics in commodity futures

In commodity futures markets, contracts with various delivery dates trade simultaneously. Applied researchers typically discard the majority of the data and form a single time series by choosing only one price observation per day. This strategy precludes a full understanding of these markets and can induce complicated nonlinear dynamics in the data. In this paper, I introduce the partially overlapping time series (POTS) model to model jointly all traded contracts. The POTS model incorporates time‐to‐delivery, storability, seasonality and GARCH effects. I apply the POTS model to corn futures at the Chicago Board of Trade and the results uncover substantial inefficiency associated with delivery on corn futures. The results also support two theories of commodity pricing: the theory of storage and the Samuelson effect. Copyright © 2005 John Wiley & Sons, Ltd.     

Availability and settlement of individual stock futures and options expiration-day effects: evidence from high-frequency data

This study examines whether the expiration-day effects of stock options traded in Australian Stock Exchange on return, volatility, trading volume, and temporary price changes of individual stocks vary with the availability and the settlement method of individual stock futures contracts. Using transaction data of the stocks that have both options and futures contacts from 1993 to 1997, we find that options expiration has significant effects on return and volatility of the underlying stocks in absence of individual stock futures. After introduction of a cash-settled stock futures contract, the effects decrease notably. However, the switch of a futures contract from cash settlement to physical delivery promotes the expiration effects on return and volatility and boosts temporary price changes on expiration days. Finally, options expiration has little effect on trading volume. Trading activity tends to behave normally regardless whether stock futures contracts are available or not.     

Forecasting market prices

Previous research into forecasts of market prices has shown that sophisticated forecasts are futile for many markets. This paper reviews recent research and identifies those markets for which non-trivial forecasts can lead to profitable decisions. Particular attention is given to futures and options markets and to the application of non-linear time series models.     

Futures options with futures-style margining in the Gaussian models setting

This paper investigates the effects of the markung-to-market on futures and futures options. Closed form solutions for the pricung of these contracts are derived under the assumption that the forward rate follows a Gaussian model. Moreover, an upper bound of the error made by computing futures option prices under the contmuons marking-to-market instead of the discrete one is provided. Numerical comparisons suggest that the marking-to-market feature is highly affect by the model chosen. In the Ho and Lee framework discrete marking-to-market futures prices turned out to be slightly different from the continuous ones; whereas in the Vasicek model differences in prices become appreciable when the mean reversion is slow and the volatility is high.

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Valutazione di contratti futures e opzioni futures nell’ambito dei modelli Gaussiani

Riassunto In questo articolo si esaminano gli effetti di marking-to-market nella determinazione del prezzo di contratti futures e di opzioni futures. Le espressioni in forma chiusa dei prezzi di questi contratti sono determinate sotto l’ipotesi che l’intensità istantanea di interesse si evolva secondo nn modello Gaussiano. Tra i contratri futures e opzioni futures su tassi di interesse a breve trartati al LIFFE, dedichiamo la nostra analisi in particolare al caso di contratti su Eurolira. Questi contratti rappresentano infatti un fondamentale strumento per iltrading e l’hedging nel mercato Italiano dove i tassi di interesse a breve mostrano alti livelli di volatilità. Confronti unmerjci vengono foruiti nell’ambito del modello di Ho e Lee e di Vasicek. I risultati empirici suggeriscono che le differenze di prezzo nel caso discreto e continuo diventano apprezzabili nel modello di Vasicek quando laincan-veversion è bassa e la volatilità è alta.

     

APPROACHES TO PRICE FORMATION IN FINANCIALIZED COMMODITY MARKETS

A recent debate about the financialization of commodity markets has stimulated the development of new approaches to price formation which incorporate index traders as a new trader category. I survey these new approaches by retracing their emergence to traditional price formation models and show that they arise from a synthesis between commodity arbitrage pricing and behavioural pricing theories in the tradition of Keynesian inspired hedging pressure models. Based on these insights, I derive testable hypotheses and provide guidance for a growing literature that seeks to empirically evaluate the effects of index traders on price discovery in commodity futures markets.