Volume 1, Number 2 (June 2008)
Derek W. Bunn
London Business School
The second issue of the new Journal of Energy Markets reflects well the focus of the publication, by bringing advanced econometric and model-based analysis to practical problems facing analysts and traders in this sector.
The first paper by Alizadeh and Nomikos on the performance of statistical arbitrage in petroleum futures markets analyzes trading strategies based upon the statistical approach of cointegration, using some fundamental variables. As such it is an advanced synthesis of fundamental modeling and technical methods to support trading. It is well known that cointegration estimates may not always be robust, or readily generalized, and so it is appropriate that this research undertakes extensive robustness and out-of-sample testing.
The second paper by Solibakke on the efficiency and transmission of shocks between European power markets also looks at statistical links between prices, again using an advanced technique. Using a multivariate semi-parametric GARCH model, price level and volatility transmission are analyzed between the German and Nordic markets in Northern Europe. Evidence for the directed influence of price formation, mainly from the Nordic, and the cross-volatility analysis have important implications for traders interested in short-term price dynamics. Turning to longer-term implications of price risk, six researchers from the IIASA in Austria – Fortin et al, author the third paper on the very topical subject of real options in power investment. Extending the conditional value-at-risk (CVaR) approach from contract portfolios to real investment portfolios is an appealing concept in the face of greater risk awareness and constraints. This paper shows that given the highly uncertain, and non-normal risk variables involved in power investment, especially in the face of greater carbon trading, the CVaR approach can provide superior insights into conventional mean-variance investment diversification strategies.
Finally, the fourth paper by Mari on modeling power prices applies to nonlinear regime-switching methods to capture the stochastic jumps and spikes that present such difficulties in power price prediction. The novel aspect of this work is to relate the regime-switching specification to supply-demand imbalances. This is an important paper in a very fertile area of research into modeling non-linear power price dynamics.
Overall, all four papers are characterized by their practical relevance, empirical focus and leading-edge modeling techniques.
Papers in this issue
Performance of statistical arbitrage in petroleum futures markets
Efficiency and transmission in European energy markets: a seminon-parametric approach
An integrated CVaR and real options approach to investments in the energy sector
Random movements of power prices in competitive markets: a hybrid model approach