Journal of Energy Markets

Derek W. Bunn

London Business School

The energy commodities, power, gas and oil, have been in the headlines for most of this year with their price levels and volatilities creating substantial social and economic agitation. Concerns about the future prices and economic effects of these commodities have been elevated beyond even their usual levels. This issue is therefore timely in looking at modeling some of their forward drivers, volatility and spillover effects.

The opening paper by Borak and Weron, “A semiparametric factor model for electricity forward curve dynamics”, provides a new approach for modeling electricity forward curves. Electricity presents special challenges in forward curves analysis because of its seasonality, dependence on fundamentals, including weather and the influence of high spot volatility in the near term. Developing a parsimonious model in this context is therefore a challenge, distinct from more conventional financial forward curve analyses. Borak andWeron address this in a theoretically attractive way using a semiparametric factor model, and show that it can provide an efficient approach in practice, using Nordic data.

In contrast, analysis of forward gas contracts is pursued in the paper by Spargoli and Zagaglia, “The comovements along the forward curve of natural gas futures: a structural view”. Using a structural multivariate volatility model with a recursive assumption, whereby shocks to the volatility of the returns are transmitted from the short to the long section of the forward curve, they are able to model spillover effects from the shorter to the longer maturities.

Related to natural gas are the gas products, butane, propane and naptha. In “Price dynamics of natural gas components: empirical evidence” byWestgaard et al, an analysis of the unobservable time series components reflecting trends and seasonality in these products is undertaken from an adaptive Kalman filtering perspective. In particular, their analysis raises doubts upon the conventional view that mean reversion should be a prominent feature of these time series.

Finally, moving to oil itself, which seems to be the primitive driver of all energy commodities, Aloui et al, present an analysis in their paper, “Crude oil volatility shocks and stock market returns”, of the much discussed spillover effects of oil price volatility into the capital markets. Using two approaches, including MGARCH, the expected negative, and asymmetric effects of oil volatility on asset returns are identified from a precise modeling framework.

Overall, the papers in this issue continue to address important, topical themes in understanding the impacts and stochastic evolution of energy commodities, with leading-edge econometric techniques.