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Rafał Weron - One of the best experts on this subject based on the ideXlab platform.

  • Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period
    Journal of Futures Markets, 2016
    Co-Authors: Stefan Trück, Rafał Weron
    Abstract:

    We examine Convenience Yields and risk premiums in the EU‐wide CO 2 emissions trading scheme (EU‐ETS) during the first Kyoto commitment period (2008–2012). We find that the market has changed from initial backwardation to contango with significantly negative Convenience Yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking, as well as returns, variance, or skewness in the EU‐ETS spot market. Our findings suggest that the drop in risk‐free rates during and after the financial crisis has impacted on the deviation from the cost‐of‐carry relationship for emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between Convenience Yields and the increasing level of inventory during the first Kyoto commitment period, providing an explanation for the high negative Convenience Yields. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices. Overall, our results contribute to the literature on the determinants and empirical properties of Convenience Yields and risk premiums for this relatively new class of assets. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:587–611, 2016

  • Convenience Yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period
    HSC Research Reports, 2015
    Co-Authors: Stefan Trück, Rafał Weron
    Abstract:

    We examine Convenience Yields in the EU-wide CO2 emissions trading scheme (EU-ETS) during the first Kyoto commitment period (2008-2012). We find that the market has changed from initial backwardation to contango with significantly negative Convenience Yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking as well as returns, variance or skewness in the EU-ETS spot market. Our findings suggest that the drop in risk-free rates during and after the financial crisis has impacted on the deviation from the cost-of-carry relationship for Kyoto commitment emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between Convenience Yields and the increasing level of inventory during the first Kyoto commitment period providing an explanation for the high negative Convenience Yields during Phase II. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices.

  • Convenience Yields for Co2 Emission Allowance Futures Contracts
    SSRN Electronic Journal, 2006
    Co-Authors: Szymon Borak, Wolfgang Karl Härdle, Stefan Trück, Rafał Weron
    Abstract:

    In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation. Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of Convenience Yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant Convenience Yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the Yields can be explained by the price level and volatility of the spot prices. We conclude that the Yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.

Chang-wen Duan - One of the best experts on this subject based on the ideXlab platform.

  • Raw Material Convenience Yields and Business Cycle
    Handbook of Quantitative Finance and Risk Management, 2010
    Co-Authors: Chang-wen Duan, William T. Lin
    Abstract:

    This paper extends the methodology of Milonas and Thomadakis (1997) to estimate raw material Convenience Yields with futures prices during the period 1996 to 2005. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience Yields for crude oil and agricultural commodity exhibits seasonal behavior. The Convenience yield for crude oil is the highest in the winter, while that for agricultural commodities are the highest in the initial stage of the harvest period. The empirical result show that WTI crude oil is more sensitive to high winter demand and that Brent crude oil is more sensitive to shortages in winter supply. The theory of storage points out that the marginal Convenience yield on inventory falls at a decreasing rate as inventory increases which could be verified through those products affected by seasonality, but could not be observed by products affected by demand/supply. Convenience Yields are negatively related to interest rates The negative relationship implies that the increase in the carry cost of commodity – namely the interest rate – would cause the yield of holding spot to decline. We also show that Convenience Yields may explain the price spread between WTI and Brent crude oil as well as the ratio between soybean and corn. Our estimated Convenience Yields are consistent with Fama and French (1988) in that commodity prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices have fewer variables than spot prices at lower inventory levels.

  • Oil Convenience Yields estimated under demand/supply shock
    Review of Quantitative Finance and Accounting, 2007
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels.

  • oil Convenience Yields estimated under demand supply shock
    Review of Quantitative Finance and Accounting, 2007
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels. Copyright Springer Science+Business Media, LLC 2007

  • Oil Convenience Yields estimated under demand/supply shock
    Review of Quantitative Finance and Accounting, 2006
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels. Copyright Springer Science+Business Media, LLC 2007

Stefan Trück - One of the best experts on this subject based on the ideXlab platform.

  • Convenience Yields and risk premiums in the eu ets evidence from the kyoto commitment period
    Journal of Futures Markets, 2016
    Co-Authors: Stefan Trück, Rafal Weron
    Abstract:

    We examine Convenience Yields and risk premiums in the EU‐wide CO 2 emissions trading scheme (EU‐ETS) during the first Kyoto commitment period (2008–2012). We find that the market has changed from initial backwardation to contango with significantly negative Convenience Yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking, as well as returns, variance, or skewness in the EU‐ETS spot market. Our findings suggest that the drop in risk‐free rates during and after the financial crisis has impacted on the deviation from the cost‐of‐carry relationship for emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between Convenience Yields and the increasing level of inventory during the first Kyoto commitment period, providing an explanation for the high negative Convenience Yields. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices. Overall, our results contribute to the literature on the determinants and empirical properties of Convenience Yields and risk premiums for this relatively new class of assets. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:587–611, 2016

  • Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period
    Journal of Futures Markets, 2016
    Co-Authors: Stefan Trück, Rafał Weron
    Abstract:

    We examine Convenience Yields and risk premiums in the EU‐wide CO 2 emissions trading scheme (EU‐ETS) during the first Kyoto commitment period (2008–2012). We find that the market has changed from initial backwardation to contango with significantly negative Convenience Yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking, as well as returns, variance, or skewness in the EU‐ETS spot market. Our findings suggest that the drop in risk‐free rates during and after the financial crisis has impacted on the deviation from the cost‐of‐carry relationship for emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between Convenience Yields and the increasing level of inventory during the first Kyoto commitment period, providing an explanation for the high negative Convenience Yields. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices. Overall, our results contribute to the literature on the determinants and empirical properties of Convenience Yields and risk premiums for this relatively new class of assets. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:587–611, 2016

  • Convenience Yields and risk premiums in the EU-ETS - Evidence from the Kyoto commitment period
    HSC Research Reports, 2015
    Co-Authors: Stefan Trück, Rafał Weron
    Abstract:

    We examine Convenience Yields in the EU-wide CO2 emissions trading scheme (EU-ETS) during the first Kyoto commitment period (2008-2012). We find that the market has changed from initial backwardation to contango with significantly negative Convenience Yields in futures contracts. We further examine the impact of interest rate levels in the Eurozone, the increasing level of surplus allowances and banking as well as returns, variance or skewness in the EU-ETS spot market. Our findings suggest that the drop in risk-free rates during and after the financial crisis has impacted on the deviation from the cost-of-carry relationship for Kyoto commitment emission allowances (EUA) futures contracts. Our results also illustrate a negative relationship between Convenience Yields and the increasing level of inventory during the first Kyoto commitment period providing an explanation for the high negative Convenience Yields during Phase II. Finally, we find that market participants are willing to pay an additional risk premium in the futures market for a hedge against increased volatility in EUA prices.

  • Convenience Yields for Co2 Emission Allowance Futures Contracts
    SSRN Electronic Journal, 2006
    Co-Authors: Szymon Borak, Wolfgang Karl Härdle, Stefan Trück, Rafał Weron
    Abstract:

    In January 2005 the EU-wide CO2 emissions trading system (EU-ETS) has formally entered into operation. Within the new trading system, the right to emit a particular amount of CO2 becomes a tradable commodity - called EU Allowances (EUAs) - and affected companies, traders and investors will face new strategic challenges. In this paper we investigate the nature of Convenience Yields for CO2 emission allowance futures. We conduct an empirical study on price behavior, volatility term structure and correlations in different CO2 EUA contracts. Our findings are that the market has changed from initial backwardation to contango with significant Convenience Yields in future contracts for the Kyoto commitment period starting in 2008. A high fraction of the Yields can be explained by the price level and volatility of the spot prices. We conclude that the Yields can be interpreted as market expectation on the price risk of CO2 emissions allowance prices and the uncertainty of EU allocation plans for the Kyoto period.

Gregorio Serna - One of the best experts on this subject based on the ideXlab platform.

  • the stochastic seasonal behavior of energy commodity Convenience Yields
    Energy Economics, 2013
    Co-Authors: Andres Garcia Mirantes, Javier Poblacion, Gregorio Serna
    Abstract:

    This paper contributes to the commodity pricing literature by consistently modeling the Convenience yield with its empirically observed properties. Specifically, in this paper, we show how a four-factor model for the stochastic behavior of commodity prices, with two long- and short-term factors and two additional seasonal factors, may accommodate some of the most important empirically observed characteristics of commodity Convenience Yields, such as the mean reversion and stochastic seasonality. Based on this evidence, a theoretical model is presented and estimated to characterize the commodity Convenience yield dynamics that are consistent with previous findings. We also show that commodity price seasonality is better estimated through Convenience Yields than through futures prices.

William T. Lin - One of the best experts on this subject based on the ideXlab platform.

  • Raw Material Convenience Yields and Business Cycle
    Handbook of Quantitative Finance and Risk Management, 2010
    Co-Authors: Chang-wen Duan, William T. Lin
    Abstract:

    This paper extends the methodology of Milonas and Thomadakis (1997) to estimate raw material Convenience Yields with futures prices during the period 1996 to 2005. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience Yields for crude oil and agricultural commodity exhibits seasonal behavior. The Convenience yield for crude oil is the highest in the winter, while that for agricultural commodities are the highest in the initial stage of the harvest period. The empirical result show that WTI crude oil is more sensitive to high winter demand and that Brent crude oil is more sensitive to shortages in winter supply. The theory of storage points out that the marginal Convenience yield on inventory falls at a decreasing rate as inventory increases which could be verified through those products affected by seasonality, but could not be observed by products affected by demand/supply. Convenience Yields are negatively related to interest rates The negative relationship implies that the increase in the carry cost of commodity – namely the interest rate – would cause the yield of holding spot to decline. We also show that Convenience Yields may explain the price spread between WTI and Brent crude oil as well as the ratio between soybean and corn. Our estimated Convenience Yields are consistent with Fama and French (1988) in that commodity prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices have fewer variables than spot prices at lower inventory levels.

  • Oil Convenience Yields estimated under demand/supply shock
    Review of Quantitative Finance and Accounting, 2007
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels.

  • oil Convenience Yields estimated under demand supply shock
    Review of Quantitative Finance and Accounting, 2007
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels. Copyright Springer Science+Business Media, LLC 2007

  • Oil Convenience Yields estimated under demand/supply shock
    Review of Quantitative Finance and Accounting, 2006
    Co-Authors: William T. Lin, Chang-wen Duan
    Abstract:

    This paper extends the call option model of Milonas and Thomadakis (1997) to estimate oil Convenience Yields with futures prices. We define the business cycle of a seasonal commodity with demand/supply shocks and find that the Convenience yield for crude oil exhibits seasonal behavior. The Convenience yield for West Texas Intermediate (WTI) crude oil is the highest in the summer, while that for Brent crude oil is the highest in the winter. This implies that WTI crude oil is more sensitive to high summer demand and that Brent crude oil is more sensitive to shortages in winter supply. Convenience Yields are negatively related to the inventory level of the underlying crude oil and positively related to interest rates due to the business cycle. We also show that Convenience Yields may explain price spread between WTI crude oil and Brent crude oil. Our computed Convenience Yields are consistent with Fama and French (1988) in that oil prices are more volatile than futures prices at low inventory level, verifying the Samuelson (1965) hypothesis that future prices are less variables than spot prices at lower inventory levels. Copyright Springer Science+Business Media, LLC 2007