Table Of ContentLecture Notes in Energy 54
Sofia Ramos
Helena Veiga E ditors
The
Interrelationship
Between
Financial and
Energy Markets
Lecture Notes in Energy
Volume 54
LectureNotesinEnergy(LNE)isaseriesthatreportsonnewdevelopmentsinthe
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Sofia Ramos Helena Veiga
(cid:129)
Editors
The Interrelationship
Between Financial
and Energy Markets
123
Editors
SofiaRamos HelenaVeiga
Department of Finance Department of Statistics
InstitutoUniversitáriode Lisboa Universidad CarlosIII deMadrid
(ISCTE-IUL) Getafe
Lisboa Spain
Portugal
ISSN 2195-1284 ISSN 2195-1292 (electronic)
ISBN 978-3-642-55381-3 ISBN 978-3-642-55382-0 (eBook)
DOI 10.1007/978-3-642-55382-0
LibraryofCongressControlNumber:2014945256
SpringerHeidelbergNewYorkDordrechtLondon
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Preface
Inthelastdecade,energymarketshavedevelopedsubstantiallyduetothegrowing
activity of financial investors. One consequence of this massive presence of
investors is a stronger link between the hitherto segmented energy and financial
markets.“TheInterrelationshipBetweenFinancialandEnergyMarkets”isthetitle
of this book, and it addresses some of the recent developments between financial
and energy markets. It aims to further the understanding of the rich interplay
between financial and energy markets by presenting several empirical studies that
illustrate and discuss some of the main issues on this agenda.
Postgraduate students, researchers, and practitioners with a solid background in
economic and finance theory are the target audience. Many chapters contain a
strong componentof quantitative methods applied to energy finance along with an
up-to-date survey of the literature, thus allowing the reader to get up to speed on
these topics.
A number of issues were omitted, including the regulatory aspects of the
European energy markets and financial aspects on renewable and green energy, so
astoavoidanoverlapwiththecontentsofotherbooksbySpringer,e.g.Financial
AspectsofEnergyandtheHandbookofNaturalResourcesandEnergyEconomics.
As a whole, the 12 chapters of “The Interrelationship Between Financial and
Energy Markets” aim to provide an overview of important aspects of the oil
industry, the impact of oil shocks, electricity markets, and the analytical and
quantitative tools applicable to energy finance.
Thisbookistheresultofinputfrommanypeople.Inparticular,wewouldliketo
thank the authors of the chapters, as well as the reviewers for their helpful
comments.
v
Acknowledgments
To our families
We are also grateful to the staff of Springer.
Lastbutnotleastwearegratefultoourfamiliesandfriends.Sofiaisgratefulto
the support of Francisco, Miguel and Paulo, but also her parents António and
Gracinda. Sofia is also grateful to the friendship of Helena and José Manuel in all
these years of work together.
Helena is grateful to her husband, Marc Vorsatz, without him these last few
yearswouldbemoredifficulttogo.Helenaisalsogratefultoherparents,Joséand
Conceição,for theirunconditional supportandtothefriendshipandenthusiasmof
Sofia that makes the research together a pleasure.
vii
Contents
Part I Oil Industry
Risk Factors in the Oil Industry: An Upstream
and Downstream Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Sofia B. Ramos, Helena Veiga and Chih-Wei Wang
Cost, Risk-Taking, and Value in the Airline Industry . . . . . . . . . . . . . 33
Paul A. Laux, He Yan and Chi Zhang
Part II The Impact of Oil Shocks
Oil Prices, Volatility, and Shocks: A Survey. . . . . . . . . . . . . . . . . . . . 57
Ulrich Oberndorfer
Oil Shock Transmission to Stock Market Returns:
Wavelet-Multivariate Markov Switching GARCH Approach. . . . . . . . 71
Rania Jammazi
Forcing Variables in the Dynamics of Risk Spillovers
in Oil-Related CDS Sectors, Equity, Bond and Oil Markets
and Volatility Market Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
Shawkat Hammoudeh and Ramazan Sari
Oil Futures Market: A Dynamic Model of Hedging
and Speculation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Giulio Cifarelli and Giovanna Paladino
Evaluating the Empirical Performance of Alternative Econometric
Models for Oil Price Forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Andrea Bastianin, Matteo Manera, Anil Markandya and Elisa Scarpa
ix
x Contents
Part III Electricity Markets
Commodity Price Interaction: CO Allowances, Fuel Sources
2
and Electricity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
Mara Madaleno, Carlos Pinho and Cláudia Ribeiro
An Overview of Electricity Price Regimes
in the U.S. Wholesale Markets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
José G. Dias and Sofia B. Ramos
Pricing Futures and Options in Electricity Markets. . . . . . . . . . . . . . . 233
Fred Espen Benth and Maren Diane Schmeck
Switching from Feed-in Tariffs to a Tradable Green
Certificate Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Aitor Ciarreta, Maria Paz Espinosa and Cristina Pizarro-Irizar
Unobserved Heterogeneous Effects in the Cost Efficiency
Analysis of Electricity Distribution Systems . . . . . . . . . . . . . . . . . . . . 281
Per J. Agrell, Mehdi Farsi, Massimo Filippini and Martin Koller
Introduction
Beforetheearly2000s,commoditiesandenergymarketswerepartiallysegmented
from outside financial markets and even from each other. During the 2000s, a
series of academic articles publicized negative correlations between commodities
and stock market and bond indexes, and the positive correlation with inflation. In
investmentlanguagethismeansthatinvestmentsincommodities,andinparticular
energy, provide diversification benefits as well as inflation hedging. These
attractivefeaturescapturedtheattentionoffinancialinvestorsastheywerecoming
totermswiththeburstofthedotcombubble.Theinflationhedgingpropertywas
also welcomed by long-term investors for whom the inflation risk is a major
concern.
World dependence on energy has grown steadily in the last decades. Figure 1
depicts the world consumption of primary energy and the striking increase is
evident.Between1965and2012,theconsumptiontripled.Thesteepupwardtrend
ofconsumptioninChinaandotheremergingcountriesisalsocleartosee.Overall,
the worldwide consumption of energy is dominated by China, the US, and the
European Union, and together they accounted for 53 % of the world primary
energy consumption in 2012.
According to the Energy Information Administration’s International Energy
Outlook 2013, world energy consumption will rise to 56 % in the next three
decades driven by growth in developing countries such as China and India. Their
projectionsalsoindicatethatdemandinChinaisexpectedtodoublethatoftheUS
by 2040. Therefore, there is a huge potential for growth in the energy markets.
Thederegulationoftheenergysector isanotherfactor thathas further boosted
thelinksbetweenmarkets.The1980smarkedthestartofawaveofderegulationof
severalstate-ownedindustries,includingelectricity,inmanycountriesliketheUS
and the UK. The deregulation process in the energy sector aimed to create a new
institutional framework that benefited consumers and fostered welfare. The
regulationswerechangedinordertoattractalargernumberofmarketparticipants
to competitive sectors given the well-known difficulty inchallenging incumbents.
Prices were expected to fluctuate more as they were no longer being curbed, and
thisbroughtnewrisksformarketparticipants.Inaddition,theCommodityFutures
xi
