Revisiting the excess co-movements of commodity prices in a data-rich environment.

We reinvestigate the issue of excess comovements of commodity prices initially raised in Pindyck and Rotemberg (1990). While Pindyck and Rotemberg and following contributions consider this issue using an arbitrary set of control variables, we develop our analysis using recent development in large approximate factor models so that a richer information set can be considered. This ensures that fundamentals, a necessary concept for any excess comovement analysis, are modelled as well as possible. We then consider different measures of correlation to assess comovement and we provide evidence of excess comovement for a set of 8 seemingly unrelated commodities. Our results indicate that excess comovement in returns does exist even when the issue of heteroscedasticity is considered. We extend our analysis to the excess comovement of volatilities and show that, contrary to the case of returns, comovement vanishes once the effect of fundamentals have been taken out.spillover index; heteroscedasticity-corrected correlation; factor models; commodity excess comovement hypothesis;

An International Comparison of Health Care Expenditure Determinants

In this paper, we estimate a health care demand function for 18 OECD countries for the period 1972-1995. We consider a demand side approach where health expenditure depend on per capita GDP and the relative price of health care. We use panel data unit root and stationarity tests to characterize our data. Then, we test cointegration between our variables with Kao[16] panel data cointegration tests. As we accept cointegration, we compare different estimators (OLS, FMOLS, DOLS). Results give conflicting evidence for the value of health expenditure income elasticity. The least biased estimator gives a value that exceeds unity.Cointegration, Health Expenditure, OECD, Panel test

Volatility transmission and volatility impulse response functions in European electricity forward markets.

A  l’aide de données quotidiennes  sur  la période mars  2001 à  juin  2005, nous estimons un modèle VAR‐BEKK  et montrons  l’existence  de  transmissions  au  niveau  des  rendements  et  des  volatilités  entre  les marchés  forward  de  l’électricité  pour  l’Allemagne,  les  Pays‐Bas  et  la  Grande‐Bretagne. Nous  appliquons  la fonction VIRF de Hafner and Herwartz [2006, Journal of  International Money and Finance 25, 719‐740] afin de mesurer  l’impact  d’un  choc  sur  la  volatilité  conditionnelle. Nous  observons  qu’un  choc  a  un  impact  positif important seulement si son amplitude est grande en regard du niveau de la volatilité à cet instant. Finalement, nous estimons  la densité des  fonctions VIRF pour différents horizons de prévisions.  Ces distributions lissées  sont asymétriques  et montrent que des  évènements extrêmes sont  possibles même si leur  probabilité est faible. Ces résultats ont des implications intéressantes pour les participants au marché dont la politique de gestion des risques est basée sur les prix des options, eux‐mêmes dépendant du niveau de volatilité.Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719–740] Volatility Impulse Response Function (VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be a consequence of the non-storability of power. Finally, we estimate the density of the VIRF at different forecast horizons. These fitted distributions are asymmetric and show that large increases in expected conditional volatilities are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy depends on option prices which themselves depend on the characteristics of volatility.volatility spillovers; electricity forward markets; multivariate GARCH; volatility impulse response function; transmission de volatilité; marché forward de l’électricité; GARCH multivarié; Fonction impulsion réponse de volatilité;

Volatility transmission and volatility impulse response functions in European electricity forward markets

Using daily data from March 2001 to June 2005, we estimate a VAR-BEKK model and find evidence of return and volatility spillovers between the German, the Dutch and the British forward electricity markets. We apply Hafner and Herwartz [2006, Journal of International Money and Finance 25, 719-740] Volatility Impulse Response Function(VIRF) to quantify the impact of shock on expected conditional volatility. We observe that a shock has a high positive impact only if its size is large compared to the current level of volatility. The impact of shocks are usually not persistent, which may be an indication of market efficiency. Finally, we estimate the density of the VIRF at different forecast horizon. These fitted distributions are asymmetric and show that extreme events are possible even if their probability is low. These results have interesting implications for market participants whose risk management policy is based on option prices which themselves depend on the volatility level.volatility impulse response function, GARCH, non Gaussian distributions, electricity market, forward markets

Optimal hedging in European electricity forward markets.

This article is concerned with modeling the dynamic and distributional properties of daily spot and forward electricity prices across European wholesale markets. Prices for forward contracts are extracted from a unique database from a major energy trader in Europe. Spot and forward returns are found to be highly non normally distributed. Alternative densities provide a better fit of data. In all cases, conditional heteroscedastic models are used with success to specify the data generating process of returns. We derive implications from the relation between spot and forward prices for the evaluation of hedging effectiveness of bilateral contracts. The relation is parametrized by the mean of multivariate GARCH models possibly allowing for dynamic conditional correlation. Because correlation between spot and forward returns is very low on each market, derived optimal hedge ratios are insignificant. We conclude to a great inefficiency for forward markets at least for short-term horizon. Hedging effectiveness is not improved, for our data, through the use of dynamic correlation models.Electricity; multivariate GARCH; dynamic correlation models; non Gaussian densities; optimal hedging; cross-hedging;

On the non-convergence of energy intensities: evidence from a pair-wise econometric approach

This paper evaluates convergence of energy intensities for a group of 97 countries in the period 1971-2003. Convergence is tested using a recent method proposed by Pesaran (2007) [M.H. Pesaran. A pair- wise approach to testing for output and growth convergence. Journal of Econometrics 138, 312-355.] based on the stochastic convergence criterion. Main advantages of this method are that results do not depend on a benchmark against which convergence is assessed, and that it is more robust. Applications of several unit-root tests as well as a stationarity test uniformly reject the global convergence hypothesis. Locally, for Middle-East, OECD and Europe sub-groups, non-convergence is less strongly rejected. The introduction of possible structural breaks in the analysis only marginally provides more support to the convergence hypothesis.Energy intensity, pair-wise test, unit-root test, stationarity test, structural break, convergence

Sleeper end resistance of ballasted railway tracks

This paper describes model tests used to investigate how ballast shoulder width and height contribute to a railway sleeper’s resistance to lateral movement for a range of shoulder widths and heights. Deflection and resistance were measured and photographs taken during the tests.The photographs were analyzed using a digital image correlation technique to identify the zones of ballast surface disturbance, which demonstrated that a bulbed failure volume was mobilized at the ultimate limit state. An idealized three-dimensional failure mechanism is proposed, and resistances are calculated using the limit equilibrium approach. The calculation provides a reliable estimate of the measured resistance. The work identifies the optimum shoulder width and height. The calculations are extended to demonstrate that when a number of sleepers are moved simultaneously, the sleeper end resistance may be one-third less per sleeper than that indicated in tests on an isolated sleeper. Image analysis and limit equilibrium calculations show that this is caused by overlapping of mobilized failure volumes from adjacent sleepers

Options Introduction and Volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection

Options introduction and volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identi¯cation of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.EU ETS, Option prices, Volatility, GARCH, Rolling Estimation, Endogenous Structural Break Detection

Options introduction and volatility in the EU ETS

To improve risk management in the European Union Emissions Trading Scheme (EU ETS), the European Climate Exchange (ECX) has introduced option instruments in October 2006 after regulatory authorization. The central question we address is: can we identify a potential destabilizing effect of the introduction of options on the underlying market (EU ETS futures)? Indeed, the literature on commodities futures suggest that the introduction of derivatives may either decrease (due to more market depth) or increase (due to more speculation) volatility. As the identification of these effects ultimately remains an empirical question, we use daily data from April 2005 to April 2008 to document volatility behavior in the EU ETS. By instrumenting various GARCH models, endogenous break tests, and rolling window estimations, our results overall suggest that the introduction of the option market had no effect on the volatility in the EU ETS. These finding are robust to other likely influences linked to energy and commodity markets.