Hipòlit Torró

Short-Term Electricity Futures Prices: Evidence on the Time-Varying Risk Premium

This paper examines empirically the relationship between electricity spot and futures prices, by analysing a decade of data for a set of short term-to-maturity futures contracts traded in the Nordic Power Exchange, Nord Pool. It is found that, on average, there are significant positive risk premiums in short-term electricity futures prices. The significance and size of the premiums, however, varies seasonally over the year; whereas it is greatest during winter, it is zero in summer. It is also found that time-varying risk premiums are significantly related to unexpectedly low reservoir levels. Furthermore, before the unprecedented supply-shock that hit the Nord Pool market around the end of year 2002, the variation of the risk premiums was related to the variance and the skewness of future spot prices. This result is consistent with the view that risk considerations played a role in the determination of futures prices. Finally, additional evidence provided throughout the paper supports the view that circumstances changed in the Nord Pool market after the shock period. Este trabajo estudia la relacion entre los precios de contado y a futuro de la electricidad a traves de un analisis empirico realizado sobre los precios a futuro a corto plazo negociados durante una decada en el mercado nordico de electricidad, Nord Pool. Los resultados indican que existen primas de riesgo positivas en media en los contratos de futuro a corto plazo. Sin embargo, la significatividad y tamano de las primas varia estacionalmente a lo largo del ano, siendo las de mayor tamano durante el invierno y nulas durante el verano. Tambien se encuentra evidencia significativa relativa a la capacidad explicativa de los niveles anormalmente bajos de las reservas hidraulicas sobre la variacion temporal de las primas de riesgo. Ademas, antes del shock de oferta que azoto el mercado Nord Pool a finales del ano 2002, la variacion de las primas de riesgo estaba relacionada con la varianza y asimetria de los precios futuros de la electricidad. Este resultado es coherente con la vision de que el riesgo se tomaba en consideracion en la determinacion de los precios a futuro. Finalmente, a lo largo de todo el documento se muestra evidencia adicional a favor de la opinion de que las cirscustancias cambiaron en el Nord Pool despues del periodo turbulento.

Single Factor Stochastic Models with Seasonality Applied to Underlying Weather Derivatives Variables

This invention relates to a cup-like device having drain openings therein which is made as a unitary structure by injection molding of a flexible elastic plastic such as low-density polyethylene, polyvinyl chloride (PVC), or the like. The cup may readily be secured to, or removed from, a golf club head without the use of tools and when so secured may be used to retrieve golf balls from relatively inaccessible locations or to pick up golf balls after a practice session. Attachment and removal of the cup from the golf club is accomplished by insertion or removal of the club shaft by deflecting a flexible portion of a clip member integral with the cup and then moving the clip and cup along the shaft into engagement with or detachment from the golf club head.

Volatility Transmission Patterns and Terrorist Attacks

The objective of this study is to analyze volatility transmission between the US and Eurozone stock markets considering the effects of the September 11, March 11 and July 7 financial crises. In order to do this, we use a multivariate GARCH model and take into account the asymmetric volatility phenomenon, the non-synchronous trading problem and the crises themselves. Moreover, a graphical analysis of the Asymmetric Volatility Impulse-Response Functions (AVIRF) is introduced, which takes into consideration the crisis effect. Results suggest that there is bidirectional and asymmetric volatility transmission and show the different impact that terrorist attacks had on both markets.

The Economic Value of Volatility Transmission Between the Stock and Bond Markets

This study has two main objectives. Firstly, volatility transmission between stocks and bonds in European markets is studied using the two most important financial assets in these fields: the DJ Euro Stoxx 50 index futures contract and the Euro Bund futures contract. Secondly, a trading rule for the major European futures contracts is designed. This rule can be applied to different markets and assets to analyze the economic significance of volatility spillovers observed between them. The results indicate that volatility spillovers take place in both directions and that the stock‐bond trading rule offers very profitable returns after transaction costs. These results have important implications for portfolio management and asset allocation.

Model Based Monte Carlo Pricing of Energy and Temperature Quanto Options

Weather derivatives have become very popular tools in weather risk management in recent years. One of the elements supporting their diffusion has been the increase in volatility observed on many energy markets. Among the several available contracts, Quanto options are now becoming very popular for a simple reason: they take into account the strong correlation between energy consumption and certain weather conditions, so enabling price and weather risk to be controlled at the same time. These products are more efficient and, in many cases, significantly cheaper than simpler plain vanilla options. Unfortunately, the specific features of energy and weather time series do not enable the use of analytical formulae based on the Black-Scholes pricing approach, nor other more advanced continuous time methods that extend the Black-Scholes approach, unless under strong and unrealistic assumptions. In this study, we propose a Monte Carlo pricing framework based on a bivariate time series model. Our approach takes into account the average and variance interdependence between temperature and energy price series. Furthermore, our approach includes other relevant empirical features, such as periodic patterns in average, variance, and correlations. The model structure enables a more appropriate pricing of Quanto options compared to traditional methods.

European Natural Gas Seasonal Effects on Futures Hedging

This paper is the first to discuss the design of futures hedging strategies in European natural gas markets (NBP, TTF and Zeebrugge). A common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather, demand, and storage level seasonalities. This paper follows and extends the Ederington and Salas (2008) framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed. Our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis (futures price minus spot price). This fact remain true for short (a week) and long (one, three and six months) hedging periods. Furthermore, volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer. A simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions. Seasonal hedging strategies, linear regression based strategies, or even a naive position, perform better than more sophisticated statistical methods.

Firm size and volatility analysis in the Spanish stock market

Using Spanish stock market data, this paper examines volatility spillovers between large and small firms and their impact on expected returns. By using a conditional capital asset pricing model (CAPM) with an asymmetric multivariate GARCH-M covariance structure, it is shown that there exist bidirectional volatility spillovers between both types of companies, especially after bad news. After estimating the model, a positive and significant price of risk is obtained. This result is consistent with the volatility feedback effect, one of the most popular explanations of the asymmetric volatility phenomenon, and explains why risk premiums are much more sensitive to negative return shocks coming from the whole market or other related markets.

Anatomy of Risk Premium in UK Natural Gas Futures

In many futures markets, trading is concentrated in the front contract and positions are rolled-over until the strategy horizon is attained. In this paper, a pair-wise comparison between the conventional risk premium and the accrued risk premium in rolled-over positions in the front contract is carried out for UK natural gas futures. Several novel results are obtained. Firstly, and most importantly, the accrued risk premium in rollover strategies is significatively larger than conventional risk premiums and increases with the time to delivery. Specifically, for strategy horizons between three and six months, this difference increases from 1% to 10%. Secondly, it is the first time that risk premium in day-ahead futures has been measured in this market. The average value of the day-ahead risk premium is 0.5% per day and it is statistically significant. Thirdly, all risk premiums are significantly larger and more volatile in winter. Finally, risk premium time-variation is analyzed using a regression model. It is shown that reservoirs, weather, liquidity, volatility, skewness, and seasons are able in all cases to explain between 21% and 59% of the risk premium time-variation (depending on the futures maturity and sub-period).

Large and Small Cap Stocks in Europe: Covariance Asymmetry, Volatility Spillovers and Beta Estimates

Several studies show that small cap returns tend to behave differently from large cap returns (Banz, 1981; Chan and Chen, 1991). This fact suggests that diversifying into small cap stocks might improve portfolio performance. In fact, the main empirical evidence on small cap returns shows that small caps distinguish themselves from large caps due to economic and market related characteristics (for a literature review on this topic see Petrella, 2005).

Have Volatility Transmission Patterns between the USA and Spain Changed after September 11

On 11 September 2001, the USA experienced its most devastating terrorist attack. This attack had an influence over several economic variables and it obviously affected financial markets. Taking into account the increasing global financial integration, an important question arises: Could recent terrorist attacks have increased even more interrelations between financial markets?