The purpose of this paper is to investigate the forward curve dynamics in an electricity market. Six years of price data on futures and forward contracts traded in the Nordic electricity market are analysed. For the forward price function of electricity, we specify two different multifactor term structure models in a Heath-Jarrow-Morton framework. Principal component analysis is used to reveal the volatility structure in the market. The two most important factors are a ”shifting ” factor that moves the whole curve in one direction, and a ”tilting ” factor that influence short and long term contracts in opposite directions. This dynamic structure parallels empirical evidence from other markets. On the other hand, in some respects electricity differs from most other commodities and financial markets. As much as ten factors are needed to explain 95 % of the variation in the price data. Furthermore, correlation between short- and long term forward prices is lower than in other markets. We discuss briefly reasons for why these special properties occur, and some consequences for hedging exposures in this market. Key words: Electricity forward market, HJM framework, principal component analysis.

We model equilibrium spot and futures oil prices in a general equilibrium production economy. In our model production of the consumption good requires two inputs: the consumption good and a commodity, e.g., Oil. Oil is produced by wells whose flow rate is costly to adjust. Investment in new Oil wells is costly and irreversible. As a result in equilibrium, investment in Oil wells is infrequent and lumpy. Even though the state of the economy is fully described by a one-factor Markov process, the spot oil price is not Markov (in itself). Rather it is best described as a regime-switching process, the regime being an investment ‘proximity’ indicator. The resulting equilibrium oil price exhibits mean-reversion and heteroscedasticity. Further, the risk premium for exposure to commodity risk is time-varying, positive in the far-from-investment regime but negative in the near-investment regime. Further, our model captures many of the stylized facts of oil futures prices, such as backwardation and the ‘Samuelson effect.’ The futures curve exhibits backwardation as a result of a convenience yield, which arises endogenously. We estimate our model using the Simulated Method of

We document a new stylized fact regarding the term-structure of futures volatility. We show that the relationship between the volatility of futures prices and the slope of the term structure of prices is non-monotone and has a “V-shape”. This aspect of the data cannot be generated by basic models that emphasize storage while this fact is consistent with models that emphasize investment constraints or, more generally, time-varying supply-elasticity. We develop an equilibrium model in which futures prices are determined endogenously in a production economy in which investment is both irreversible and is capacity constrained. Investment constraints affect firms investment decisions, which in turn determine the dynamic properties of their output and consequently imply that the supply-elasticity of the commodity changes over time. Since demand shocks must be absorbed either by changes in prices, or by changes in supply, time-varying supply-elasticity results in time-varying volatility of futures prices. Calibrating this model, we show it is quantitatively consistent with the aforementioned “V-shape ” relationship between the volatility of futures prices and the slope of the term-structure. We are grateful to Kerry Back, Pierre Collin-Dufresne, Francis Longstaff and Craig Pirrong, as well as seminar participants at Northwestern University and Texas A&M University for useful suggestions. We also thank Krishna Ramaswamy for providing us with the futures data. Financial support from the Rodney L.

Khalil and Devi Dedari for research assistance and Bob McNown for helpful comments at an early stage of this project and Jeff Pliskin and participants in a workshop at the Levy Institute for helping comments and suggestions at a later stage. PROFITABILITY AND THE TIME-VARYING LIQUIDITY PREMIUM IN THE TERM STRUCTURE OF INTEREST RATES The existence, magnitude, and determinants of a. "liquidity premium " in the term structure of interest rates have been a source of controversy in the analysis of interest rate behavior for decades. This issue has received renewed attention in the past few years due to the failure of the t@expectationstl theory of the term structure to perform adequately in empirical tests. (See, for example, N. Gregory Mankiw and Lawrence Summers, 1984, and Mankiw, 1986.) The expectations theory, which holds that any long-term interest rate must equal the expectation of the movements in shorter-term rates over the term to maturity of the long-term

currency transactions has the unique distinction of having attracted the ire of a power no less than the U.S. Congress. Introduced by Bob Dole and three other politicians, the "Prohibition on United Nations Taxation Act of 1996 " aimed at preventing UN officials and agencies from developing or promoting the Tobin tax or any other international taxation scheme under a different name. 2 Leaving aside the irony of a country with the greatest arrears in its dues to the UN, telling the international body what it should and should not do, what made the Tobin tax such an unwelcome proposal to the U.S. Congress was, as Raffer (1998) argues, its potential to bolster national autonomy and distribute the tax burden more equally around the globe. Both ran "counter to current tide of liberalization, globalization, and tax reductions for the well-off " (p. 530). Tobin's main reason for proposing his tax was of course more technical in nature. His main concern was to curb currency speculation, which he thought was responsible for the much greater frequency of exchange rate crises around the world since the trend of capital liberalization took hold. In much of the academic criticism on the Tobin tax, the debate concentrated on its feasibility and the "distorting " effects it would have as any tax does on private decisions. 3 Some also cautioned against its potential to detract attention from discussions of more far reaching solutions to the problem of international financial volatility (Taylor and Eatwell 2000, p. 93). But, few if any other than Davidson (1997, 1998) have questioned- on Keynesian grounds- that in theory such a transaction tax would dampen financial volatility and curb

We gratefully acknowledge financial support from FWO and ICM, and help with the data from the USDA. We also thank Pierre Six, Marno Verbeek and especially Michael Brennan and Philips for useful comments, and other participants at the 2008 Corporate Finance Day (Rotterdam), workshops at K.U.Leuven and the University of Illinois, and the AFFI2008 International Meeting. All errors are the authors’. Forerunners to this paper were circulating under the name “Modeling Scarcity in Convenience

The purpose of this paper is to investigate the forward curve dynamics in an electricity market. Six years of price data on futures and forward contracts traded in the Nordic electricity market are analysed. For the forward price function of electricity, we specify two different multifactor term structure models in a Heath-Jarrow-Morton framework. Principal component analysis is used to reveal the volatility structure in the market. A two-factor model explains 75 % of the price variation in our data, compared to approximately 95 % in most other markets. Further investigations show that correlation between short- and long term forward prices is lower than in other markets. We briefly discuss possible reasons why these special properties occur, and some consequences for hedging exposures in this market. JEL Classification Codes: C330, G130, Q490 The purpose of this paper is to conduct an empirical investigation of electricity

and employment opportunity. No person shall be denied admission to any educational program or activity or be denied employment on the basis of any legally prohibited discrimination involving, but not limited to, such factors as race, color, creed, religion, national or ethnic origin, sex, age or handicap. The University is committed to the maintenance of affirmative action programs which will assure the continuation of such equality of opportunity. Risk Management in Agricultural Markets: A Survey

I show that relative levels of aggregate consumption and personal oil consumption provide an excellent proxy for oil prices, and that high oil prices predict low future aggregate consumption growth. Motivated by these facts, I add an oil consumption good to the long-run risk model of Bansal and Yaron [2004] to study the asset pricing implications of observed changes in the dynamic interaction of consumption and oil prices. Empirically I observe that, compared to the first half of my 1987- 2010 sample, oil consumption growth in the last 10 years is unresponsive to levels of oil prices, creating an decrease in the mean-reversion of oil prices, and an increase in the persistence of oil price shocks. The model implies that the change in the dynamics of oil consumption generates increased systematic risk from oil price shocks due to their increased persistence. However, persistent oil prices also act as a counterweight for shocks to expected consumption growth, with high expected growth creating high expectations of future oil prices which in turn slow down growth. The combined effect is to reduce overall consumption risk and lower the equity premium. The model also predicts that these changes affect the riskiness of of oil futures contracts, and combine to create a hump shaped

In this article we describe a new method for investing in commodities. This method combines a macro approach designed for generating long-term returns to hedge expected inflation with a fundamental view on how commodities should perform on a relative basis. The macro based allocation strategically weights commodities by their risk contribution and targets optimal diversification, and these weights vary depending upon the changing risk environment and the business cycle at the macro level. In the near-term, fundamental views based upon the long accepted “Theory of Storage ” increase positions in commodities that are expected to outperform and reduce weight in those expected to lag. In addition, the very structure of the futures markets influences the way we need to trade. We make a compelling case for this Commodities Total Return (CTR) method as a far more investor appropriate construct than other commodity portfolios because it approaches commodity investing from all levels and from a market perspective. CTR seeks a total return that improves upon the long-term expected inflation hedging goal rather than accepting an arbitrarily developed index, and can add value from nearer-term inefficiencies in the commodity futures markets themselves. CTR is designed with the goal of offering these risk and return characteristics while still providing the same, if not better, expected