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;

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;

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;

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

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 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.

The three dimensional power spectrum of dark and luminous matter from the VIRMOS-DESCART cosmic shear survey

We present the first optimal power spectrum estimation and three dimensional deprojections for the dark and luminous matter and their cross correlations. The results are obtained using a new optimal fast estimator (Pen 2003) deprojected using minimum variance and SVD techniques. We show the resulting 3-D power spectra for dark matter and galaxies, and their covariance for the VIRMOS-DESCART weak lensing shear and galaxy data. The survey is most sensitive to nonlinear scales k_NL ~ 1 h Mpc^-1. On these scales, our 3-D power spectrum of dark matter is in good agreement with the RCS 3-D power spectrum found by (Hoekstra et al 2002). Our galaxy power is similar to that found by the 2MASS survey, and larger than that of SDSS, APM and RCS, consistent with the expected difference in galaxy population. We find an average bias b=1.24+/-0.18 for the I selected galaxies, and a cross correlation coefficient r=0.75+/-0.23. Together with the power spectra, these results optimally encode the entire two point information about dark matter and galaxies, including galaxy-galaxy lensing. We address some of the implications regarding galaxy halos and mass-to-light ratios. The best fit ``halo'' parameter h=r/b=0.57+/-0.16, suggesting that dynamical masses estimated using galaxies systematically underestimate total mass. Ongoing surveys, such as the Canada-France-Hawaii-Telescope-Legacy survey will significantly improve on the dynamic range, and future photometric redshift catalogs will allow tomography along the same principles.Comment: 17 pages, 19 figures, submitted to mnra

Cosmological Constraints From the 100 Square Degree Weak Lensing Survey

We present a cosmic shear analysis of the 100 square degree weak lensing survey, combining data from the CFHTLS-Wide, RCS, VIRMOS-DESCART and GaBoDS surveys. Spanning ~100 square degrees, with a median source redshift z~0.78, this combined survey allows us to place tight joint constraints on the matter density parameter Omega_m, and the amplitude of the matter power spectrum sigma_8, finding sigma_8*(Omega_m/0.24)^0.59 = 0.84+/-0.05. Tables of the measured shear correlation function and the calculated covariance matrix for each survey are included. The accuracy of our results is a marked improvement on previous work owing to three important differences in our analysis; we correctly account for cosmic variance errors by including a non-Gaussian contribution estimated from numerical simulations; we correct the measured shear for a calibration bias as estimated from simulated data; we model the redshift distribution, n(z), of each survey from the largest deep photometric redshift catalogue currently available from the CFHTLS-Deep. This catalogue is randomly sampled to reproduce the magnitude distribution of each survey with the resulting survey dependent n(z) parametrised using two different models. While our results are consistent for the n(z) models tested, we find that our cosmological parameter constraints depend weakly (at the 5% level) on the inclusion or exclusion of galaxies with low confidence photometric redshift estimates (z>1.5). These high redshift galaxies are relatively few in number but contribute a significant weak lensing signal. It will therefore be important for future weak lensing surveys to obtain near-infra-red data to reliably determine the number of high redshift galaxies in cosmic shear analyses.Comment: 14 pages, 6 figures, accepted for publication by MNRA

Convergence among five industrial countries (1870–1994): Results from a time varying cointegration approach

In this paper, we check the hypothesis of a time varying cointegration relation between four industrial countries’ per capita GDPs and US per capita GDP on the period from 1870 to 1994. Park and Hahn (1999) give the methodology. Results confirm the hypothesis of time evolving cointegration in all cases. Tests on the parameters of these cointegration relations show that, from the 1980’s onwards, we can accept the hypothesis of stochastic convergence between France, Germany and Japan, on one hand, and the United States on the other. Copyright Springer-Verlag 2005Cointegration, convergence, O40, C22,