Journal of Energy Markets


Derek W. Bunn

London Business School

Welcome to the second issue of the thirteenth volume of The Journal of Energy Markets.

Our first paper looks at what is a major energy policy issue, both currently and for the foreseeable future: namely, the financial impact of seeking to fulfil the 2015 Paris Agreement to mitigate global warming. In their paper “Carbon pricing paths to a greener future, and potential roadblocks to public companies’ creditworthiness”, Giorgio Baldassarri Höger von Högersthal, Arsene Lui, Hrvoje Tomičić and Luka Vidovic, all from S&P Global Market Intelligence, focus on how the increasing burden of meeting carbon emission taxes will affect corporate financial performance. They introduce a quantitative, top-down approach to estimate how energy transition risk may impact the creditworthiness of public companies globally within the next thirty years. By leveraging company-specific carbon dioxide emissions, country-and-industry-specific carbon tax scenarios, and a market-driven probability of default model covering approximately 34 000 companies globally, the authors’ findings suggest that the utilities, materials, energy and consumer staples sectors may be the most default-prone industries over a fast transition.

Also choosing a topical global perspective, the issue’s second paper – “International announcements and West Texas Intermediate crude oil futures: a case study on the 2008 global financial crisis” by Konstantinos Gkillas, Christoforos Konstantatos, Athanasios Tsagkanos and Dimitrios I. Vortelinos – examines the impact of both international monetary policy and the announcements of professionals on WTI crude oil futures. The authors’ methodology involves an event study and a case study, with the case study referring to the time period around the Lehman Brothers collapse. The direction, magnitude and significance of impacts are assessed in terms of returns and volatility for both daily and weekly price, volume and open interest series. The econometric method uses a nonparametric quantile regression framework. Announcements are classified into four categories: three concern international monetary policy, from the United Kingdom, the United States and the European Economic and Monetary Union; and the fourth concerns the announcements of financial professionals. The impact of announcements on oil prices remains a crucially sensitive factor in oil futures, and quantitative research on this topic is highly valuable.

The third paper in this issue, “Optimal extraction and taxation of strategic natural resources: a differential game approach” by Moustapha Pemy, looks at what is a major public policy issue for many countries: the optimal extraction and taxation of nonrenewable natural resources. It is well known that the market values of our main strategic resources, such as oil, natural gas, uranium and copper, fluctuate randomly following global and seasonal macroeconomic parameters. The author models these values using Markov-switching Lévy processes and then formulates a differential game. The two players in this differential game are a mining company, whose aim is to maximize the revenues generated from its extracting activities, and a government agency, who is in charge of regulating and taxing natural resources. A Nash equilibrium is established and the corresponding Hamilton–Jacobi–Isaacs equations are solved to provide the optimal extraction and taxation rates. Numerical examples are presented to illustrate Pemy’s results.

Finally, in “Optimal weights and hedge ratio behavior in Brent oil and Islamic Gulf stock markets”, Salim Ben Sassi, Jihed Majdoub and Walid Mansour examine the dynamics and spillover behavior of time-varying optimal weights and hedge ratios in these markets. They estimate a VARMABEKKGARCH model and derive optimal dynamic portfolios. The authors’ results reveal that the time-varying weights and hedge ratios are indeed dynamic, giving portfolio performances that are different from those of the conventional mean-value approach. These findings are of significant value within the context of international portfolio diversification.

All four papers in this issue therefore address concerns of international prominence in the global energy sector and show how advanced quantitative, model-based analysis can provide valuable insights. In this respect, they are a representative selection of the research areas that The Journal of Energy Markets seeks to advance.

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