Energy sources used for the research 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Linkage among the U.S. Energy Futures Markets
Kentaka Aruga and Shunsuke Managi Presentation of paper by Kentaka Aruga E-mail: kentaka.aruga@gmail.com 34th IAEE International Conference, Stockholm, June 19-23, 2011 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Research objective
Purpose of this paper: provide information to diversify the U.S. energy source use Testing price linkage among the U.S. major energy source markets Testing the price linkage with consideration of structural breaks in the price series. 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Contents of the presentation
Back ground Previous studies Methods and Data Results Conclusions 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Energy sources used for the research 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Energy sources are divided into three categories. Fossil fuel, Nuclear, and Biofuel energy source. ‹#›
Back ground: significance of study
In need of redesigning the U.S. energy portfolio Reduce level of CO2 emissions: replace carbon-intensive fuels with lower-carbon fuels Diversifying the energy source will reducing the risk of energy shortage Understanding the current linkage among the major energy source markets 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Back ground: current share of U.S. energy sources
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Previous studies
Crude oil and refined oil products Price linkage found among U.K. crude oil and refined oil markets for 1995-1998 period (Asche et al., 2003). Price linkage existed among U.S. oil related input (crude oil)and output prices (gasoline, heating oil) for 2001-2008 period (Mjelde and Bessler, 2009). Crude oil, natural gas, and coal Natural gas market shows linkage with U.S. crude oil and petroleum market for the 1994-2007 period(Brown and Yucel 2008; Hartley et al., 2008). When analyzed oil and gas market with the U.S. coal market they do not belong to one market for the 1990-2004 period (Bachmeier and Griffin,2006 ). 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Asche, F., Gjolberg, O., Volker, T., 2003. Price relationships in the petroleum market: an analysis of crude oil and refined product prices. Energy Economics 25, 289-301. Asche, F., Osmundsen, P., Sandsmark, M., 2006. The UK market for natural gas, oil, and electricity: are the prices decouples? Energy Journal 27, 27-40. Mjelde and Bessler 2009, weekly data, Market integration among electricity markets and their major fuel source markets. Energy Economics 31 Brown and Yucel 2008, weekly data, What drives natural gas prices? (The Energy Journal 29(2)) Hartley, P.R., Medlock, K.B., Rosthal, J.E., 2008. The relationship of natural gas to oil prices. Energy Journal 29, 47-65. Bachmeier, L., Griffin, J.M., 2006. Testing for market integration: crude oil, coal, and natural gas. Energy Journal 27, 55-71. ‹#›
Previous studies
Uranium and the major energy sources The prices of the U.S. crude oil, natural gas, coal, and uranium are not fully linked for the 2001-2008 period (Mjelde and Bessler, 2009). Vegetable oil and oil related products No strong evidence of price linkage was found between the EU vegetable oil and diesel price for 2005-2007 period (Peri and Baldi, 2010). 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Mjelde and Bessler, and Peri and Baldi, weekly price series Peri, M., Baildi, L. 2010. Vegetable oil market and biofuel policy: an asymmetric cointegration approach. Energy Economics 32, 687-93. ‹#›
Methods
1 2 Tests on price linkage with breaks 3 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Johansen Method
Developed by S. Johansen (1988, 1990, 1991) from late 1980s through early 1990s cf. Johansen, S. (1988) “Statistical Analysis of Cointegration Vectors,” Journal of Economic Dynamics and Control 12: 231-254. Johansen, S., and K. Juselius (1990) "Maximum Likelihood Estimation and Inference on Cointegration-with Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics 52: 169-210. Johansen, S. (1991) “Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models,” Econometrica 59: 1551-1580. Step 1: Conduct stationarity tests on all price series In this research ADF (1979), PP (1988), and KPSS (1992) tests are used for this purpose Step 2: Conduct multivariate and bivariate cointegration tests 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Kwiatkowski-Phillips-Schmidt-Shin (KPSS) ‹#›
Bai-Perron Method
Bai and Perron’s (1998) multiple break test cf. Bai J, Perron P . 1998. “Estimating and Testing Linear Models With Multiple Structural Changes,” Econometrica 66: 47–78. Step 1: Test on whether the price series contain unknown breaks (Double maximum tests) Step 2: Identify the statistically appropriate number of breaks in the series Step 3: Split the price series using the break dates identified in Bai-Perron test 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Cointegration tests on the break periods
We conducted the break tests on natural logarithm ratios for the pairs of energy source prices For every break periods identified by the Bai-Perron test, we conducted the Johansen cointegration test for the pairs of energy source prices We compared the results of cointegration test for periods before and after the break dates 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Data
All price series are the daily futures prices traded on the New York Market Exchange (NYMEX) Periods used for the sample observations WTI and Brent crude oil, coal, and natural gas futures prices: July 2001 - May 2010 Uranium futures price: May 2007 –May 2010 Ethanol futures price: April 2008 – May 2010 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
Number of observations: Jul. 2001- May 2010 – 2292 May 2007 –May 2010 – 785 April 2008 – May 2010 – 550 ‹#›
Plots of the data
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Plots of the data
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Results: unit root tests
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Results: Multivariate Johansen tests
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Results: Bivariate Johansen tests
6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011 Oil related Ethanol
QL VS QB Max test (12.52(0.093),3.2(0.0738)) UX vs QB Max test(11.88(0.1151),3.74(0.0531)) Parenthesis is the p-value ‹#›
Results: Bai-Perron test
No break No break 6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011
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Results: Cointegration test with breaks
6/20/2011 34th IAEE International Conference, Stockholm, June 19-23, 2011 08-09 05-06
Lutkepohl, H., and Saikkonen, P., and Trenkler, C. 2001. Maximum eigenvalue versus trace tests for the cointegrating rank of a VAR process. Journal of Econometrics 4. It is found that the local power of corresponding maximum eigenvalue and trace tests is very similar. A Monte Carlo comparison shows, however, that there may be differences in small samples. The trace tests tend to have more distorted sizes whereas their power is in some situations superior to that of the maximum eigenvalue tests. ‹#›
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