Futures basis, inventory and commodity price volatility: an empirical analysis

We employ a large dataset of physical inventory data on 21 different commodities for the period 1993–2011 to empirically analyze the behavior of commodity prices and their volatility as predicted by the theory of storage. We examine two main issues. First, we analyze the relationship between inventory and the shape of the forward curve. Low (high) inventory is associated with forward curves in backwardation (contango), as the theory of storage predicts. Second, we show that price volatility is a decreasing function of inventory for the majority of commodities in our sample. This effect is more pronounced in backwardated markets. Our findings are robust with respect to alternative inventory measures and over the recent commodity price boom.

The Valanginian δ13C excursion may not be an expression of a global oceanic anoxic event

Marine and terrestrial sediments of the Valanginian age display a distinct positive δ13C excursion, which has recently been interpreted as the expression of an oceanic anoxic episode (OAE) of global importance. Here we evaluate the extent of anaerobic conditions in marine bottom waters and explore the mechanisms involved in changing carbon storage on a global scale during this time interval. We asses redox-sensitive trace-element distributions (RSTE; uranium, vanadium, cobalt, arsenic and molybdenum) and the quality and quantity of preserved organic matter (OM) in representative sections along a shelf-basin transect in the western Tethys, in the Polish Basin and on Shatsky Rise. OM-rich layers corresponding in time to the δ13C shift are generally rare in the Tethyan sections and if present, the layers are not thicker than several centimetres and total organic carbon (TOC) contents do not surpass 1.68 wt..%. Palynological observations and geochemical properties of the preserved OM suggest a mixed marine and terrestrial origin and deposition in an oxic environment. In the Polish Basin, OM-rich layers show evidence for an important continental component. RSTE exhibit no major enrichments during the δ13C excursion in all studied Tethyan sections. RSTE enrichments are, however, observed in the pre-δ13C excursion OM-rich “Barrande” levels of the Vocontian Trough. In addition, all Tethyan sections record higher Mn contents during the δ13C shift, indicating rather well-oxygenated bottom waters in the western Tethys and the presence of anoxic basins elsewhere, such as the restricted basins of the North Atlantic and Weddell Sea. We propose that the Valanginian δ13C shift is the consequence of a combination of increased OM storage in marginal seas and on continents (as a sink of 12C-enriched organic carbon), coupled with the demise of shallow-water carbonate platforms (diminishing the storage capacity of 13C-enriched carbonate carbon). As such the Valanginian provides a more faithful natural analogue to present-day environmental change than most other Mesozoic OAEs, which are characterized by the development of ocean-wide dysaerobic to anaerobic conditions.

Risk premia in covered bond markets

The authors empirically explore risk premia in mortgage covered bond markets. Using a large panel dataset of covered bond asset swap spreads, they study the impact of different legal and economic environments. Conducting an in-depth analysis of this market, the authors find significant but small differences between countries during normal market periods. However, these differences are much stronger during times of economic crisis. Moreover, they find that developments in the real estate market are of relatively little importance during stable market periods. During economic distress, however, they are of high importance for explaining risk premia in covered bond markets

The (de)merits of minimum-variance hedging: application to the crack spread

We study the empirical performance of the classical minimum-variance hedging strategy, comparing several econometric models for estimating hedge ratios of crude oil, gasoline and heating oil crack spreads. Given the great variability and large jumps in both spot and futures prices, considerable care is required when processing the relevant data and accounting for the costs of maintaining and re-balancing the hedge position. We find that the variance reduction produced by all models is statistically and economically indistinguishable from the one-for-one “naïve” hedge. However, minimum-variance hedging models, especially those based on GARCH, generate much greater margin and transaction costs than the naïve hedge. Therefore we encourage hedgers to use a naïve hedging strategy on the crack spread bundles now offered by the exchange; this strategy is the cheapest and easiest to implement. Our conclusion contradicts the majority of the existing literature, which favours the implementation of GARCH-based hedging strategies.

Seasonality and the valuation of commodity options

Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.

Credit risk in covered bonds

Covered bonds are a promising alternative for prime mortgage securitization. In this paper, we explore risk premia in the covered bond market and particularly investigate whether and how credit risk is priced. In extant literature, yield spreads between high-quality covered bonds and government bonds are often interpreted as pure liquidity premia. In contrast, we show that although liquidity is important, it is not the exclusive risk factor. Using a hand-collected data set of cover pool information, we find that the credit quality of the cover assets is an important determinant of covered bond yield spreads. This effect is particularly strong in times of financial turmoil and has a significant influence on the issuer's refinancing cost.

Commodity futures prices: more evidence on forecast power, risk premia and the theory of storage

In this paper, we examine the temporal stability of the evidence for two commodity futures pricing theories. We investigate whether the forecast power of commodity futures can be attributed to the extent to which they exhibit seasonality and we also consider whether there are time varying parameters or structural breaks in these pricing relationships. Compared to previous studies, we find stronger evidence of seasonality in the basis, which supports the theory of storage. The power of the basis to forecast subsequent price changes is also strengthened, while results on the presence of a risk premium are inconclusive. In addition, we show that the forecasting power of commodity futures cannot be attributed to the extent to which they exhibit seasonality. We find that in most cases where structural breaks occur, only changes in the intercepts and not the slopes are detected, illustrating that the forecast power of the basis is stable over different economic environments.

The dynamics of commodity prices

In this paper we study the stochastic behavior of the prices and volatilities of a sample of six of the most important commodity markets and we compare these properties with those of the equity market. we observe a substantial degree of heterogeneity in the behavior of the series. Our findings show that it is inappropriate to treat different kinds of commodities as a single asset class as is frequently the case in the academic literature and in the industry. We demonstrate that commodities can be a useful diversifier of equity volatility as well as equity returns. Options pricing and hedging applications exemplify the economic impacts of the differences across commodities and between model specifications.

Handbook of research methods and applications in empirical finance

The objective of this book is to present the quantitative techniques that are commonly employed in empirical finance research together with real world, state of the art research examples. Each chapter is written by international experts in their fields. The unique approach is to describe a question or issue in finance and then to demonstrate the methodologies that may be used to solve it. All of the techniques described are used to address real problems rather than being presented for their own sake and the areas of application have been carefully selected so that a broad range of methodological approaches can be covered. This book is aimed primarily at doctoral researchers and academics who are engaged in conducting original empirical research in finance. In addition, the book will be useful to researchers in the financial markets and also advanced Masters-level students who are writing dissertations.

The importance of the volatility risk premium for volatility forecasting

In this paper, we study the role of the volatility risk premium for the forecasting performance of implied volatility. We introduce a non-parametric and parsimonious approach to adjust the model-free implied volatility for the volatility risk premium and implement this methodology using more than 20 years of options and futures data on three major energy markets. Using regression models and statistical loss functions, we find compelling evidence to suggest that the risk premium adjusted implied volatility significantly outperforms other models, including its unadjusted counterpart. Our main finding holds for different choices of volatility estimators and competing time-series models, underlying the robustness of our results.

Commodity price dynamics and derivatives valuation: a review

This paper reviews extant research on commodity price dynamics and commodity derivatives pricing models. In the first half, we provide an overview of stylized facts of commodity price behavior that have been explored and documented in the theoretical and empirical literature. In the second half, we review existing derivatives pricing models and discuss how the peculiarities of commodity markets have been integrated in these models. We conclude the paper with a brief outlook on important research questions that need to be addressed in the future.

Booms and busts in commodity markets: bubbles or fundamentals?

This paper considers whether there were periodically collapsing rational speculative bubbles in commodity prices over a 40-year period from the late 1960s. We apply a switching regression approach to a broad range of commodities using two different measures of fundamental values—estimated from convenience yields and from a set of macroeconomic factors believed to affect commodity demand. We find reliable evidence for bubbles only among crude oil and feeder cattle, showing the popular belief that the extreme price movements observed in commodity markets were caused by pure speculation to be unsustainable

Palaeoenvironmental changes during the Valanginian: new insights from variations in phosphorus contents and bulk- and clay mineralogies in the western Tethys

Paleoenvironmental and paleoclimatic changes during the Valanginian carbon isotopic excursion (CIE) have been investigated in the western Tethys. For this purpose, bulk-rock and clay mineralogies, as well as phosphorus (P) contents were evaluated in a selection of five sections located in the Vocontian Basin (Angles, SE France; Alvier, E Switzerland; Malleval, E France), and the Lombardian Basin (Capriolo, N Italy; Breggia, S Switzerland). Within the CIE interval, bulk-rock and clay mineralogies are inferred to reflect mostly climate change. The onset of the CIE (Busnardoites campylotoxus ammonite Zone) is characterized by higher detrital index (DI: sum of the detrital minerals divided by calcite contents) values and the presence of kaolinite in their clay-mineral assemblages. In the late Valanginian (from the Saynoceras verrucosum Zone up to the end of the Valanginian), the samples show relatively variable DI and lower values or the absence of kaolinite. The variation in the mineralogical composition is interpreted as reflecting a change from a climate characterized by optimal weathering conditions associated with an increase in terrigenous input on the southern European margin during the CIE towards an overall unstable climate associated with drier conditions in the late Valanginian. This is contrasted by a dissymmetry (proximal vs distal) along the studied transect, the northern Tethyan margin being more sensitive to changes in continental input compared to the distal environments. P accumulation rates (PAR) present similar features. In the Vocontian basin, P content variations are associated with changes in terrigenous influx, whereas in the Lombardian basin (i.e. Capriolo and Breggia), PAR values are less well correlated. This is mainly because the deeper part of the Tethys was less sensitive to changes in continental inputs. The onset of the CIE (top of the B. campylotoxus Zone) records a general increase in PAR suggesting an increase in marine nutrient levels. This is linked to higher continental weathering rates and the enhanced influx of nutrients into the ocean. In the period corresponding to the shift itself, P contents show a dissymmetry between the Vocontian and Lombardian basins (proximal vs distal). For the sections of Malleval, Alvier and Angles, a decrease in P concentrations associated to a decrease in detrital input is observed. In Capriolo and Breggia, PAR show maximum values during the plateau, indicating a more complex interaction between different P sources. The time interval including the top of S. verrucosum Zone up to the end of the Valanginian is characterized by variable PAR values, suggesting variable nutrient influxes. These changes are in agreement with an evolution towards seasonally contrasted conditions in the late Valanginian.

Mycolactone-dependent depletion of endothelial cell thrombomodulin is strongly associated with fibrin deposition in buruli ulcer lesions

A well-known histopathological feature of diseased skin in Buruli ulcer (BU) is coagulative necrosis caused by the Mycobacterium ulcerans macrolide exotoxin mycolactone. Since the underlying mechanism is not known, we have investigated the effect of mycolactone on endothelial cells, focussing on the expression of surface anticoagulant molecules involved in the protein C anticoagulant pathway. Congenital deficiencies in this natural anticoagulant pathway are known to induce thrombotic complications such as purpura fulimans and spontaneous necrosis. Mycolactone profoundly decreased thrombomodulin (TM) expression on the surface of human dermal microvascular endothelial cells (HDMVEC) at doses as low as 2ng/ml and as early as 8hrs after exposure. TM activates protein C by altering thrombin’s substrate specificity, and exposure of HDMVEC to mycolactone for 24 hours resulted in an almost complete loss of the cells’ ability to produce activated protein C. Loss of TM was shown to be due to a previously described mechanism involving mycolactone-dependent blockade of Sec61 translocation that results in proteasome-dependent degradation of newly synthesised ER-transiting proteins. Indeed, depletion from cells determined by live-cell imaging of cells stably expressing a recombinant TM-GFP fusion protein occurred at the known turnover rate. In order to determine the relevance of these findings to BU disease, immunohistochemistry of punch biopsies from 40 BU lesions (31 ulcers, nine plaques) was performed. TM abundance was profoundly reduced in the subcutis of 78% of biopsies. Furthermore, it was confirmed that fibrin deposition is a common feature of BU lesions, particularly in the necrotic areas. These findings indicate that there is decreased ability to control thrombin generation in BU skin. Mycolactone’s effects on normal endothelial cell function, including its ability to activate the protein C anticoagulant pathway are strongly associated with this. Fibrin-driven tissue ischemia could contribute to the development of the tissue necrosis seen in BU lesions.