Ole Gjølberg

Price relationships in the petroleum market: an analysis of crude oil and refined product prices

In this paper the relationships between crude oil and refined product prices are investigated in a multivariate framework. This allows us to test several (partly competing) assumptions of earlier studies. In particular, we find that the crude oil price is weakly exogenous and that the spread is constant in some but not all relationships. Moreover, the multivariate analysis shows that the link between crude oil prices and several refined product prices implies market integration for these refined products. This is an example of supply driven market integration and producers will change the output mix in response to price changes.

Risk management in the oil industry: can information on long-run equilibrium prices be utilized?

Abstract We analyze co-movements between the prices of crude oil and major refined products during the period 1992–1998. Specifically, we explore the existence of long-run equilibrium price relationships, and whether deviations from estimated equilibrium can be utilized for predictions of short-term price changes and for risk management. The econometric evidence strongly supports the hypothesis that crude and product prices are co-integrated. Past deviations from long-term equilibrium are significant in an error correction specification of short-term product price changes. The results represent valuable information for hedging, particularly in integrated oil companies for which price risk is related to margin variations.

Real options in the forest: what if prices are mean-reverting?

Abstract When solving the Faustmann problem in a stochastic setting, it is typically assumed that prices follow a random walk process. In the present paper, we instead assume that timber prices are mean-reverting. We take a real-option approach to the cutting problem and discuss what consequences mean-reverting prices will have compared to the traditional random-walk assumption. One conclusion is that what traditionally has been seen as irrational pricing with discount rates that are too low, may represent rational pricing of relatively low-risk, long-term investments.

Are Pakistan’s Rice Markets Integrated Domestically and With the International Markets?

We analyze whether Pakistan has become one domestically integrated rice market and whether Pakistan’s rice markets are integrated with the international markets, using monthly data from 1994 to 2011. During this period, major policy shifts took place. In 2002, Pakistan terminated the price support policy; in 2002-2004 export subsidies were introduced, and in 2008, a minimum export price policy was adopted. We compare the degree of integration before and after 2002. We find that most of the regional rice markets in Pakistan are integrated domestically. Pakistan’s rice markets are also integrated with the international markets, using prices in Thailand and Vietnam as benchmarks. The price support policy abolition seems to have contributed to greater domestic integration, while the subsequent export policies seem to have decreased the extent of Pakistan’s integration with the international markets. However, although Pakistan’s rice markets generally are domestically integrated as well as integrated with the international market, price adjustments are quite slow. Thus, only 3% to 11% of deviations from long-run equilibrium are adjusted on a monthly basis, indicating that a shock in international markets takes several months to be fully transferred to prices in Pakistan.

The Nordic Futures Market for Power: Finally Mature and Efficient?

A number of studies have found nearby futures prices in the Nordic power market to be biased forecasts, overshooting subsequent spot prices. This could be due to a persistent risk premium in a market dominated by long hedgers. However, in several studies the size of the bias has been taken as evidence of the market being immature and inefficient. In this paper, we present the results from an updated study of the forecasting performance of Nordic power futures. Using observations from October 2003 through January 2015, we estimate the standard models as well as a set of models in which we allow for seasonal variations and possible shifts in the risk premium, given structural changes in the market. Further, we report the results from simulated investments in which we persistently short nearby futures and maintain this position through expiration. We find that, after 2008, Nordic short-term power futures became unbiased and more precise forecasts. Consequently, we conclude that the Nordic futures market for power might have matured and now appears to be at least weak-form efficient. We suggest that the physical integration of the Nordic and Dutch markets through the opening of the NorNed cable in 2008 may have been a factor that contributed to this development.

Spatial Differences in Rice Price Volatility:A Case Study of Pakistan 1994–2011

Prices of agricultural commodities tend to be more volatile in comparison to other commodities. Volatility can result in inefficient allocation of the resources by the farmers, traders and consumers. Rice is the second major staple and export item of Pakistan. This study presents the trends in volatility of regional rice markets of Pakistan and analyses spatial differences in volatility across regional rice markets in Pakistan from 1994 to 2011, and also draws comparison of volatility with the international market. ARCH-LM tests are applied to check the presence of volatility and volatility clustering is found in all the markets. Tests for equality of variance and dynamic conditional correlations (DCC) GARCH model are employed to analyse the spatial differences across the regional rice markets of Pakistan. The results indicate the presence of spatial differences in volatility. Positive conditional correlations in the dynamic conditional correlations (DCC) GARCH model are found which indicate positive association of volatility across markets. Spatial differences in volatility and its persistence reflect the differences in market forces, infrastructure and information flow which leads to varying degree of risk across markets and some regions are exposed to higher risk. The study found out that Hyderabad and Sukkur are the most volatile markets and their volatility levels are highly persistent and require highest time to return to its long-term mean which makes them the riskiest rice markets. Investments in infrastructure, particularly in transportation and controlling the market power of middlemen may reduce price risk across markets particularly in the most risky markets.

Are piglet prices rational hog price forecasts

In this paper a simple model is developed in which the piglet price serves as a forecast for the hog price 3 months ahead. The model is tested on data from Northern Europe, viz. Norway, Sweden, Denmark and Finland during the period 1982-1992. The empirical results lend strong support to the hypothesis that hog producers hold rational expectations when pricing the piglets. Thus, the weight adjusted piglet price typically represents an unbiased (conditional) forecast with unsystematic errors for the hog price one quarter later.