Michael Tamvakis

Spillover effects in energy futures markets

Price discovery in crude oil and refined oil products has been extensively undertaken in organised futures markets for over a decade now. There are two dominant such markets today: the first one in the New York Mercantile Exchange; and the second in Londons International Petroleum Exchange. With the demise of OPEC as the leading price setter for crude and products, NYMEX light sweet crude and Brent crude have usurped the role of benchmark grades for price setting. To date considerable work has been done to scrutinise the degree to which these two markets price efficiently, but little with regard to the way the two markets interact. Participants in these markets move with relative ease from one market to the other and usually take positions in both of them. It is of interest, therefore, to investigate the information transmission mechanism by looking at spillover effects and, perhaps, identify which market is the true price leader. This paper is a first attempt to look at such a problem in the energy market, although similar studies have been done on stock market indices. It is found that substantial spillover effects do exist when both markets are trading simultaneously, although IPE morning prices seem to be considerably affected by the close of the previous day on NYMEX. Q 2001 Elsevier Science B.V. All rights reserved.

An investigation into the existence of a two-tier spot freight market for crude oil carriers

Developments in environmental legislation have exercised increased pressure on the tanker sector to improve its quality. To date, the most influential and, indisputably, the most controversial piece of legislation against oil pollution is the U.S. Oil Pollution Act that was introduced in 1990. This paper attempts an empirical examination of the effects of these developments in the spot freight market. Using a database of Worldscale fixtures over a period of four and a half years, a series of statistical tests was performed with the aim of detecting the existence of any premium paid for vessels of lower age, double hull construction, or trading to the U.S.A. The results were mixed, indicating in several cases some form of premia for US.-bound vessels, but less evidence of premia for lower age and better hull construction.

The Relation Between Return and Volatility in the Commodity Markets

In this article, results indicate that the relation between return and volatility in the commodity markets is inverse of that observed in the stock markets. The implication is that if the commodity market returns are negatively correlated with those of traditional financial assets, the introduction of commodities in those portfolios may result in the diversification of risk. This may also allow fund managers to hedge their investment portfolios with commodities, thus avoiding the use of more complicated instruments such as options.

Effects of NYMEX trading on IPE Brent Crude futures markets: a duration analysis

Abstract Recent developments in the energy markets, and the surge and dip in crude oil prices over the last few years, have renewed the interest in the workings of the two main price setting markets: Londons International Petroleum Exchange (IPE) and New Yorks Mercantile Exchange (NYMEX). The interaction of these two markets, when both of them are open (synchronous trading) and when only London is open (asynchronous trading), is important, in view of the fact that most participants take positions in both markets. This paper looks at how London is affected by New York by analysing the transaction duration of the IPE Brent futures contract, both when the NYMEX WTI futures contract is being traded and when NYMEX is closed. Using tick-by-tick data obtained from IPE, transaction durations are found to form two distinctive and inverted U-shaped patterns. Autoregressive conditional duration (ACD) model, first introduced by Engle and Russell, is applied to the data. Parameters of IPE morning and afternoon are significantly different from each other, underlining the dominant effects of NYMEX on IPE trading. The results from the current analysis reinforce previous results by the authors, which indicate that NYMEX is a leading price setter in crude oil futures prices and has a dominant effect on the IPE-traded contracts.

The dynamic relationships between paper petroleum refining and physical trade of crude oil into the United States

This article examines the relationship between refinery margins traded on paper using petroleum futures (the paper refinery) and the physical trade of crude oil into the US. Computations of a 3:2:1 crack spread were constructed using daily observations of second- and third-nearby unleaded gasoline and heating oil futures contracts traded on the New York Mercantile Exchange (NY MEX) and spot Brent crude oil prices. The crack spread represents the margin between the cost of crude oil feed stock today and the value of the products produced by a refinery in the future. Unit root tests on each of the time series found crack spreads to be stationary while crude oil imports were found to be non-stationary. A s the two series were found to be integrated of different order, cointegration analysis of the two series was not deemed appropriate. Instead, linear relationships between crack spreads and imports were examined using causality tests. It was found that the 2-month 3:2:1 crack spread Granger-causes crude oil imports and that this causality is unidirectional. The significance of these findings lies in the fact that other industries—like tanker shipping—derive their demand from the demand for, and trade in, petroleum. Crack spreads, therefore, can provide a leading indicator for short term developments in tanker demand. For a chartering manager who has ships on the spot market, crack spreads can help him/her anticipate demand developments and influence vessel deployment and chartering decisions.

Asymptotic Distribution Expansions in Option Pricing

The previous article compares different methods for estimating the empirical probability distribution for asset returns. This article looks at methods for approximating an implied risk neutral density. Constraining it to be lognormal is common practice, of course, but does not give a very good fit to actual option prices. A unique feature of this article is to examine American options, for which the implied densities must produce prices that satisfy certain bounds, without being pinned down to exact values. Some of the same procedures as described by Jensen and Poulsen, like Hermite approximation, have been explored, but Giamouridis and Tamvakis find that these techniques and several others, including a mixture of lognormals, do not work as well as an Edgeworth Series Expansion (ESE). The ESE technique relaxes the constraints on skewness and kurtosis imposed by the lognormal, without a proliferation of parameters to estimate. The ESE model is then compared in terms of performance to methods examined in 12 other studies, and is found to behave comparably, with densities that are close to a median structure across models.

Economy and Commercial Viability

When INSROP was established some five years ago, one of its mandates was to investigate the commercial viability of using the Northern Sea Route for trading purposes. To this end, Sub-programme III set out to collect information regarding commercial operations in the NSR and possible ways in which the route could be used. A great many papers have been produced, of which only a selection can be presented here. A wide range of commercial issues have been examined, including cargo generation, energy-related trade, port development and transit cargo potential, to mention only a few. In this chapter, the focus will be on three main areas: NSR development and the regional economy cargo generation from Russia to western and eastern destinations the possible use of NSR for transit purposes.

The NSR’s Commercial Potential and Restraints

When the International Northern Sea Route Programme was established, one of its mandates was to investigate the commercial viability of using the route for trading purposes. Six years down the road and several research papers later, we have built a picture, sometimes comprehensive, sometimes patchy, of how viable the commercial exploitation of the route may be.