Research

Driven by Fear? The Tail Risk Premium in Crude Oil Futures Markets 
 
[PDF] 

Abstract: Oil prices are notoriously difficult to forecast and exhibit wild swings or "excess volatility" that are difficult to rationalize by changes in fundamentals alone. This paper offers an explanation for these phenomena based on time varying disaster probabilities and disaster fears. Using information from crude oil options and futures I document economically large jump tail premia in the crude oil derivative market. These premia vary substantially over time and significantly forecast crude oil futures and spot returns. Oil futures prices overshoot (undershoot) in the presence of upside (downside) tail fears in order to allow for smaller (larger) risk premia thereafter. I also show that this overshooting (undershooting) is amplified for the spot price because of time varying benefits from holding inventory that work in the same direction. The novel oil price uncertainty measures yield additional insights into the relationship between the oil market and macroeconomic outcomes.

Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol? [PDF]

Abstract: It is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We utilize a recently proposed methodology to estimate the market’s expectations of the prices of ethanol, unfinished motor gasoline and crude oil at horizons from three months to one year. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) is likely to have increased ethanol price expectations by as much $1.45 in the year before and in the year after the implementation of the RFS had started. Our analysis of the term structure of expectations provides support for the view that a shift in ethanol storage demand starting in 2005 caused an increase in the price of ethanol. There is no conclusive evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to storage demand for corn in 2005-06.


Commodity Index Investment and the Comovement of Commodity and Stock Prices [PDF]
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Abstract:  This paper relates the comovement of stock and commodity prices to increased participation of financial investors in commodity future markets. I present a partial equilibrium model in which demand for futures by financial investors transmit stock market shocks into commodity prices via a time varying risk premium. Based on data from the Commodity Trading Futures Commission on futures positions of different market participants, I introduce a framework for the empirical evaluation of my model. The results suggest that commodity index investors react systematically to negative stock market shocks by reducing their commodity risk exposure. This increases the risk premium for commercial producers, and thereby transmits them into commodity prices. The empirical evidence is consistent with my theoretical model, and helps to explaind the increased comovement of stock and commodity returns particularly in times of market distress.

Regional Decentralization and Fiscal Policy Effects - International and Intranational Evidence [PDF] 
(joint with Abian Garcia Rodriguez)

AbstractThis paper evaluates empirically the effects from decentralizing fiscal policy. The first section comprises a cross-country analysis of 11 European countries that differ substantially in their degree of fiscal decentralization. We find that more decentralized countries, i.e. countries in which regions have larger fiscal competencies relative to the central government, tend to have larger fiscal multipliers. We also provide evidence from a case study of Spain, where we exploit time variation in fiscal decentralization. We argue that the observed temporal changes in decentralization were orthogonal to economic conditions, and can therefore be used to measure the direct impact of decentralization on output growth. We find economically large and statistically significant positive effects from the decentralization of direct taxation, and, to a lesser extent, from indirect taxation and government spending on GDP growth. In line with our cross-country analysis, the results from the case study of Spain provide evidence for efficiency gains through (regionally) tailored fiscal policy. On a more general level, we also provide new evidence for determinants of fiscal multipliers.


Current Projects:

What caused the 2014-2015 oil price drop? A retrospective analysis
(joint with Doga Bilgin, Bahattin Buyuksahin, Kun Mo and Konrad Zmitrowicz)

Structural Oil Price Shocks and Commodity Currency Trader Positions
(joint with Ron Alquist and Bahattin Buyuksahin

Measuring the Impact of Oil Price Shocks on Financial Variables
(joint with Ron Alquist



Other:

Low for Longer? Why the Global Oil Market in 2014 Is Not Like 1986  [Bank of Canada Staff Analytical Note 2016-11]
 
(joint with Bahattin Buyuksahin, Kun Mo and Konrad Zmitrowicz)

Essays in Applied Econometrics and Finance