Editor: Derek W. Bunn
Published: 25 Mar 2008
The impact of volume risk on hedge effectiveness - Value-at-risk analysis for energy commodities - Diagnosing unilateral market power in electricity reserves market - Estimating high quantiles for electricity prices by stable linear models
Papers in this issue
by Larry A. Johnson
by Chaker Aloui
by Christopher R. Knittel, Konstantinos Metaxoglou
by Christine Bernhardt, Claudia Klüppelberg, Thilo Meyer-Brandis
Derek W. Bunn
London Business School
The Journal of Energy Markets is being launched at a time of unprecedented concern about global energy issues and policy, together with the rapid emergence of increasingly sophisticated quantitative modeling techniques for the power, gas and oil markets. Price and volume drivers are complex in these markets, and the need to understand not only the expected price formation process but also the volatility clustering and emergence of spikes is stimulating substantial research of considerable methodological novelty and practical impact. The first issue of this journal is focused precisely upon these issues.
In launching this journal, the publishers and editorial board are seeking to fulfill the need for a high-quality research outlet drawing upon empirical and model-based research on energy markets, which will be of significant interest to quantitative analysts in this sector as well as researchers. We expect to publish advanced “energy econometrics” as well as theory and computational methods. Applications related to emissions trading, infrastructure capacity auctions and real investment will complement the core areas of prices, forward curves, derivatives and volume risks in the main energy commodities.
In the first paper of this issue, “Estimating high quantiles for electricity prices by stable linear models,” Bernhardt et al deal with methods for developing specific models for extreme percentiles (eg, 90%, 95%, 99% and 99.9%) around the distribution of a time series of daily electricity prices. This is not only, currently, a very topical methodology for risk management applications in general, but, given the interest in spike formation in power prices, day-ahead predictive insights have considerable potential for trading and operations. The analysis and results in this paper are impressive.
In the second paper, Johnson explores whether optimal hedging strategies for an independent power producer’s gas exposure meet some of the new accounting compliance standards. The paper is entitled, “The impact of volume risk on hedge effectiveness: the case of a natural gas independent power producer operation” and demonstrates that the volume uncertainty associated with the option of purchased electricity, together with the volatility of gas prices can lead to ineffectiveness in hedging to reach the required accounting standards. This clearly has important implications for risk management compliance.
The third paper also takes a risk management perspective. In “Value-at-risk analysis for energy commodities: long-range dependencies and fat-tails in return innovations,” Aloui shows how a careful specification of a fractionally integrated GARCH model for volatility can outperform conventional methods. The contribution is in the thorough modeling of the distributional and long memory effects, and this could lead to practical benefits in VaR applications.
Finally, in the fourth paper, Knittel and Metaxoglou present an extensive and careful analysis on, “Diagnosing unilateral market power in electricity reserves market.” Market power appears to be endemic to electricity market performance, and its analysis is of interest to both regulators and market participants. The California market of 2000–2001 has been extensively scrutinized for its conduct, and this paper has some strong implications for the effect of high market concentration in the rents obtained from generators providing the very short-term spinning and system regulation reserves. It extends some of the well-known work on this market by Wolak and others.
Overall, the enthusiasm and commitment of the publisher should be acknowledged in seeking to launch this journal expeditiously, with a desire to offer authors a very quick processing of papers and an effective reach to a readership at the interface of research and practice. Through sustaining such a publishing ambition, The Journal of Energy Markets should soon become well recognized as one of the most valuable publications in this field. The editorial and publishing team do, of course, sincerely welcome proposals, advice and suggestions for developing the prominence and impact of this journal.
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