IDEAS home Printed from https://ideas.repec.org/p/zbw/zewdip/553.html
   My bibliography  Save this paper

Backwardation and Normal Backwardation in Energy Futures Markets: With an Application to Metallgesellschaft's Short-Dated Rollover Hedging of Long-Term Contracts

Author

Listed:
  • Deaves, Richard
  • Charupat, Narat

Abstract

We show that, since the inception of energy futures markets, prices have on average exhibited backwardation. Normal backwardation has also been the norm, but, because of the low power of the standard tests, most researchers have concluded that the unbiased expectations model cannot be rejected. The fact that backwardation has been and (though somewhat more weakly) continues to be prevalent makes MGRM?s strategy of hedging long-term supply commitments with short-dated futures contracts look somewhat better than previous observers have argued. That said, it should be re-stressed that their strategy was a highly speculative one and its unraveling should have come as no great surprise.

Suggested Citation

  • Deaves, Richard & Charupat, Narat, 2002. "Backwardation and Normal Backwardation in Energy Futures Markets: With an Application to Metallgesellschaft's Short-Dated Rollover Hedging of Long-Term Contracts," ZEW Discussion Papers 02-59, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:553
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/24580/1/dp0259.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Paul Berhanu Girma & Albert S. Paulson, 1998. "Seasonality in petroleum futures spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(5), pages 581-598, August.
    2. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(1), pages 122-150, February.
    3. Neuberger, Anthony, 1999. "Hedging Long-Term Exposures with Multiple Short-Term Futures Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 429-459.
    4. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76, January.
    5. Culp Christopher L. & Miller Merton H., 1995. "Metallgesellschaft and the Economics of Synthetic Storage," Zeitschrift für Bankrecht und Bankwirtschaft (ZBB) / Journal of Banking Law and Banking (JBB), RWS Verlag, vol. 7(1), pages 2-14, March.
    6. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
    7. Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983. "Efficient Asset Portfolios and the Theory of Normal Backwardation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 319-331, April.
    8. Antonio S. Mello & John E. Parsons, 1995. "Maturity Structure Of A Hedge Matters: Lessons From The Metallgesellschaft Debacle," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 106-121, March.
    9. Richard Deaves & Itzhak Krinsky, 1992. "Risk Premiums and Efficiency in the Market for Crude Oil Futures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 93-118.
    10. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mamatzakis, E. & Remoundos, P., 2011. "Testing for adjustment costs and regime shifts in BRENT crude futures market," Economic Modelling, Elsevier, vol. 28(3), pages 1000-1008, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adam, Tim R. & Fernando, Chitru S., 2006. "Hedging, speculation, and shareholder value," Journal of Financial Economics, Elsevier, vol. 81(2), pages 283-309, August.
    2. Bühler, Wolfgang & Korn, Olaf, 1998. "Hedging langfristiger Lieferverpflichtungen mit kurzfristigen Futures: möglich oder unmöglich?," ZEW Discussion Papers 98-20, ZEW - Leibniz Centre for European Economic Research.
    3. Sykuta, Michael E., 1996. "Futures trading and supply contracting in the oil refining industry," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 317-334, July.
    4. repec:dau:papers:123456789/5470 is not listed on IDEAS
    5. Ralph C. Kimball, 2000. "Failures in risk management," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 3-12.
    6. Delphine Lautier & Alain Galli, 2010. "Dynamic hedging strategies: an application to the crude oil market," Post-Print halshs-00640802, HAL.
    7. Delphine Lautier, 1998. "Les opérations de Metallgesellschaft sur les marchés à terme de produits pétroliers:spéculation ou couverture ?," Revue Finance Contrôle Stratégie, revues.org, vol. 1(3), pages 107-129, September.
    8. Fehle, Frank & Tsyplakov, Sergey, 2005. "Dynamic risk management: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 78(1), pages 3-47, October.
    9. van den Goorbergh, R.W.J., 2004. "Essays on optimal hedging and investment strategies and on derivative pricing," Other publications TiSEM 4b4b16af-8621-463f-bbfa-0, Tilburg University, School of Economics and Management.
    10. Zeidan, Rodrigo & Müllner, Jakob, 2015. "Firm, market and top management antecedents of speculation: Lessons for corporate governance," Journal of Multinational Financial Management, Elsevier, vol. 32, pages 42-58.
    11. Sadorsky, Perry, 2002. "Time-varying risk premiums in petroleum futures prices," Energy Economics, Elsevier, vol. 24(6), pages 539-556, November.
    12. Delphine Lautier & Yves Simon, 2004. "La volatilité des prix des matières premières," Revue d'Économie Financière, Programme National Persée, vol. 74(1), pages 45-84.
    13. Bisht Deepak & Laha, A. K., 2017. "Assessment of Density Forecast for Energy Commodities in Post-Financialization Era," IIMA Working Papers WP 2017-07-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    14. Wolfgang Bühler & Olaf Korn, 2000. "Absicherung langfristiger Lieferverpflichtungen mit kurzfristigen Futures: Möglich oder unmöglich?," Schmalenbach Journal of Business Research, Springer, vol. 52(4), pages 315-347, June.
    15. Gunther Leobacher, 2008. "On a class of optimization problems emerging when hedging with short term futures contracts," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 67(1), pages 65-90, February.
    16. Peter A. Abken & Milind M. Shrikhande, 1997. "The role of currency derivatives in internationally diversified portfolios," Economic Review, Federal Reserve Bank of Atlanta, vol. 82(Q 3), pages 34-59.
    17. Dana, Julie & Gilbert, Christopher L. & Shim, Euna, 2006. "Hedging grain price risk in the SADC: Case studies of Malawi and Zambia," Food Policy, Elsevier, vol. 31(4), pages 357-371, August.
    18. Dimson, Elroy & Marsh, Paul, 1997. "Stress tests of capital requirements," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1515-1546, December.
    19. Kocagil, Ahmet E. & Topyan, Kudret, 1997. "An empirical note on demand for speculation and futures risk premium: A Kalman Filter application," Review of Financial Economics, Elsevier, vol. 6(1), pages 77-93.
    20. Monda, Barbara & Giorgino, Marco & Modolin, Ileana, 2013. "Rationales for Corporate Risk Management - A Critical Literature Review," MPRA Paper 45420, University Library of Munich, Germany.
    21. Biguri, Kizkitza & Brownlees, Christian & Ippolito, Filippo, 2022. "Corporate hedging and the variance of stock returns," Journal of Corporate Finance, Elsevier, vol. 72(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:zewdip:553. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/zemande.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.