Consequences of Electricity Restructuring on the Environment: a Survey

The aim of this paper is to assess theoretical consequences of restructuring electricity markets on the environment. We examine changes in potential behaviours in consumption-side as well as in supply-side. We show that restructuring and following access to competition is not neutral from an environmental standpoint. Deregulation could induce some negative externalities due to requirements in cost-effciency. The principal result of this paper is the need of strong incentives in public policies to compensate the new short-term horizon in which energy sector's firms are evolving, particularly concerning R&D.ELECTRICITY RESTRUCTURING; ENVIRONMENT; GREENHOUSE GAS EMISSIONS; REGULATION; INNOVATION.

Ederington's ratio with production flexibility

The impact of flexibility upon hedging decision is examined for a competitive firm under demand uncertainty. We show that if the firm can adapt its production subsequently to its hedging decision, the standard minimum variance hedge ratio from Ederington (Journal of Finance 34, 1979) is systematically biased. This resulting bias depends on the statistical relation between demand and futures prices.

Cross Hedging and Liquidity: a note

Cross hedging is a way to improve statistical hedge results because of markets'incompletion. In this framework, several markets instead of just one market, are used to increase the hedger’s financial possibilities. In the Anderson-Danthine model (1981), the optimal hedge in the multivariate case is described and commented, but transaction costs are neglected. The aim of this note is to suggest a new version of the initial model, in which transaction costs are now taken into account. In a first step, benchmark case is formalized with deterministic costs. Secondly, we consider stochastic liquidity and statistical links between liquidity levels. In the first case, the intuitive non-optimality is shown as soon as transaction costs are integrated. In the second case, a more general model is suggested and a link is mentioned with the ”commonality in liquidity” concept.CROSS HEDGING; LIQUIDITY; MEAN-VARIANCE UTILITY; COMMONALITY IN LIQUIDITY; TRANSACTION COSTS; HEDGING

On the volatility-volume relationship in energy futures markets using intraday data

This paper investigates the relationship between trading volume and price volatility in the crude oil and natural gas futures markets when using high-frequency data. By regressing various realized volatility measures (with/without jumps) on trading volume and trading frequency, our results feature a contemporaneous and largely positive relationship. Furthermore, we test whether the volatility-volume relationship is symmetric for energy futures by considering positive and negative realized semivariance. We show that (i) an asymmetric volatility-volume relationship indeed exists, (ii) trading volume and trading frequency significantly affect negative and positive realized semivariance, and (iii) the information content of negative realized semivariance is higher than for positive realized semivariance.Trading Volume; Price Volatility; Crude Oil Futures; Natural Gas Futures; High-Frequency Data; Realized Volatility; Bipower Variation; Median Realized Volatility; Realised Semivariance; Jump

A special case of self-protection: The choice of a lawyer

Considering self-protection, it is a well-known result that an increase in risk aversion does not unambiguously lead to a higher level of effort. In this paper, we consider a particular case of self-protection, the choice of a lawyer, assuming a positive relation between legal expenses and probability of success. In this context, level of effort is strictly monotone in risk aversion. We show that, paradoxically, the level of effort is not systematically higher for an indemnified more risk-averse agent than for a non-indemnified less risk-averse agent.increase in risk aversion

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 realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting

The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008-2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.CO2 Price, Realized Volatility, HAR-RV, GARCH, Futures Trading, Emissions Markets, EU ETS, Intraday data, Forecasting

A reassessment of the risk-return tradeoff at the daily horizon

This note makes two contributions by extending the analysis in Bali and Peng (2006) which investigates the risk-return tradeoff at the daily horizon using high-frequency data. Our first contribution is to show that the empirical relation between returns and risk is not validated for recent years. Our second contribution is to assess the importance of disentangling jumps from the continuous component using high-frequency data and recent nonparametric methods. We show that similar results are obtained using either realized variance or an alternative measure of realized variance which is robust to jumps thereby providing evidence that jumps do not improve significantly the explanatory power in the risk-return relation.risk-return tradeoff, ICAPM, realized volatility, bipower variation, jumps.

On the realized volatility of the ECX CO2 emissions 2008 futures contract: distribution, dynamics and forecasting

The recent implementation of the EU Emissions Trading Scheme (EU ETS) in January 2005 created new financial risks for emitting firms. To deal with these risks, options are traded since October 2006. Because the EU ETS is a new market, the relevant underlying model for option pricing is still a controversial issue. This article improves our understanding of this issue by characterizing the conditional and unconditional distributions of the realized volatility for the 2008 futures contract in the European Climate Exchange (ECX), which is valid during Phase II (2008-2012) of the EU ETS. The realized volatility measures from naive, kernel-based and subsampling estimators are used to obtain inferences about the distributional and dynamic properties of the ECX emissions futures volatility. The distribution of the daily realized volatility in logarithmic form is shown to be close to normal. The mixture-of-distributions hypothesis is strongly rejected, as the returns standardized using daily measures of volatility clearly departs from normality. A simplified HAR-RV model (Corsi, 2009) with only a weekly component, which reproduces long memory properties of the series, is then used to model the volatility dynamics. Finally, the predictive accuracy of the HAR-RV model is tested against GARCH specifications using one-step-ahead forecasts, which confirms the HAR-RV superior ability. Our conclusions indicate that (i) the standard Brownian motion is not an adequate tool for option pricing in the EU ETS, and (ii) a jump component should be included in the stochastic process to price options, thus providing more efficient tools for risk-management activities.CO2 Price; Realized Volatility; HAR-RV; GARCH; Futures Trading; Emissions Markets; EU ETS; Intraday data; Forecasting

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;