Journal of Energy Markets

Derek W. Bunn
London Business School

The four papers in this issue cover a range of energy market issues, from the macro to the micro.

The issue’s first paper, “The relationship between oil prices, global economic policy uncertainty and financial market stress” by Sayyed Mahdi Ziaei, reports on two macro studies related to oil price impacts. A study of the impacts of global economic policy uncertainty, gold prices and three-month US Treasury bill rates on oil prices between 1997 and 2020 is complemented by another on the effects of oil prices and US Treasury bill rates on a financial stress index between 1979 and 2016. To capture the long- and short-term relationships between independent and dependent variables, an asymmetric nonlinear autoregressive distributed lag model is employed for both analyses. The results confirm the significant impact of global economic policy uncertainty and gold prices on oil prices in the long run, and they show that oil prices drive both long-term and short-term effects on the financial stress index; while the negative fluctuations in oil prices have a positive effect on the financial stress index in the short run, their impact on the index turns negative in the long run.

In “Impact of changes in the global environment on price differentials between the US crude oil spot markets for the periods before and after 2008–9”, our second paper, Kannika Duangnate and JamesW. Mjelde look more closely at oil prices over 2000–17 and find that the threshold bandwidths increase for all market pairs after 2008–9. The increased bandwidths indicate an increase in transaction costs, implying that larger price differences are necessary for arbitrage to be profitable. The changes in the quantity of oil produced in the areas associated with each spot market also partially explain the increase in bandwidths, as do quality differences. Besides bandwidths, the values of the lower and upper thresholds differ according to the seasons.

Turning to electricity markets, in the third paper in the issue, “One-week-ahead electricity price forecasting using weather forecasts, and its application to arbitrage in the forward market: an empirical study of the Japan Electric Power Exchange”, Takuji Matsumoto and Misao Endo construct and compare multiple weekly models using widely published weather forecasts and apply them to arbitrage trading in the forward market. The weekly horizon is far less researched than the shorter or longer terms for power prices. They discuss the following empirical results using the data from Japan Electric Power Exchange:

• Instead of using forecasted temperature directly as an explanatory variable, the two-step forecasting method using measured temperature as an intermediate variable is more likely to reduce the forecast error.
• Quantile regression has better density forecast accuracy than generalized autoregressive conditional heteroscedasticity (GARCH).
• Logarithmic conversion for price tends to improve forecast accuracy.
• One-week-ahead weather forecasts can significantly improve both the price forecast accuracy and the arbitrage profit.

In the issue’s final paper, “A fractional Brownian–Hawkes model for the Italian electricity spot market: estimation and forecasting”, which is also on the subject of electricity markets, Luca M. Giordano and Daniela Morale study a new model for the description and forecasting of the Italian power market via an additive two-factor model. Among the characteristics of the spot prices, the presence of several jumps clustered over short time periods is particularly influential. The two-factor model they propose is therefore driven by both Hawkes and fractional Brownian processes. They discuss the seasonality, the identification of the spikes and the estimate of the Hurst coefficient, as well as looking at its forecasting performance.