Does OVX affect WTI and Brent oil spot variance? Evidence from an entropy analysis

This paper examines the flow of information and its direction between the oil volatility index (OVX) and the spot variance of WTI and Brent returns. Since OVX is an indicator of the investor sentiment about oil market performance, we aim first at evidencing whether there is an exchange of information between OVX and the spot variance of the two crudes. Moreover, since OVX is linked to WTI crude oil, it is useful to investigate whether it shares an information content with Brent. To this purpose, we propose an entropy-based approach which exploits two non-parametric methods: the mutual information and the transfer entropy. The results show an increase in the information flow between OVX and the spot variance of Brent returns and a corresponding decrease in the information flow with WTI. Furthermore, the direction of the information flow comes from OVX to both oil spot variances, thus investor sentiment about oil market performance drives uncertainty in the corresponding spot market. However, the information flow from the oil spot variances to OVX is more statistically significant for WTI than for Brent and, since transfer entropy is a measure of resolution of uncertainty, we demonstrate that the spot variance of WTI returns helps more in reducing uncertainty about OVX (than Brent).     

How do oil price shocks affect the output volatility of the U.S. energy mining industry? The roles of structural oil price shocks

This paper focuses on how explicit structural shocks that characterize the endogenous character of international oil price change affect the output volatility of the U.S. crude oil and natural gas mining industries. To this end, we employ a modified structural vector autoregressive model (SVAR) to decompose real oil-price changes into four components: U.S. supply shocks, non-U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks mainly driven by precautionary demand. The results indicate that output volatility of the U.S. crude oil and natural gas mining industry has significantly negative responses to U.S. supply shocks, aggregate demand shocks, and oil-specific demand shocks, while lacks significant response to non-U.S. supply shocks. Variance decomposition and historical decomposition confirm that U.S. supply shocks occupy most explaining variations in output volatility among the four structural oil shocks. Moreover, the oil-specific demand shocks explain more variation than that of aggregate demand shocks for the crude oil mining industry, but the opposite is true for the natural gas mining industry.     

Does the EU Emissions Trading System induce investment leakage? Evidence from German multinational firms

This study exploits the incomplete participation requirements of the European Union Emissions Trading System (EU ETS) to investigate the policy's causal effect on outward foreign direct investment (FDI) decisions of German multinational firms. Using a combination of difference-in-differences with bias-corrected matching, our baseline specification indicates that the sample average treatment effect is very small and levels out at −0.2%, but its standard error is large (0.16). Looking at a sub-sample of firms which can be considered as geographically more mobile because they are supposedly less capital-intensive, we find that a small number of EU ETS regulated firms have increased their FDI outside the EU by 52% ± 47% compared to a counterfactual scenario. Paradoxically, relocating firms neither operate in the targeted energy-intensive sectors, nor are they emission-intensive. The small emissions share of these footloose firms indeed indicates a limited potential for policy-induced leakage of emissions. On the extensive margin, we find that all EU ETS firms on average have increased the number of their affiliates outside the EU by 28% ± 24% relative to control firms. This causal change in network structures of multinational firms outside the EU is suggestive of endeavors undertaken by regulated firms to facilitate relocations in the future.     

Do changes in oil prices affect welfare programs? Evidence from Kern County

In this paper, the intertemporal causal relationship between oil prices and welfare programs in Kern County is studied using monthly data between 1999:7 and 2016:8. Results from the autoregressive distributed lag (ARDL)-bounds testing approach show that there is stable long run equilibrium relationship between CalFresh caseloads, oil prices and unemployment. They also show that adjustment in CalFresh participation due to changes in oil prices and unemployment is slow, and a 10% increase in unemployment led to a 3.3% increase in CalFresh enrollment. Results from a modified Granger Causality method indicated causality running from unemployment to CalWORKs, and no causality from oil prices to CalWORKs participation. The GIRF confirmed that CalWORKs is more responsive to changes in unemployment than to oil price shocks. The FEVDC results demonstrated that contributions of the oil price shocks in explaining variations in CalWORKs were negligible.     

How does oil price volatility affect non-energy commodity markets?

The influence of price volatility in the crude oil market is expanding to non-energy commodity markets. With the substitution of fossil fuels by biofuel and hedge strategies against inflation induced by high oil prices, the link between crude oil market and agriculture markets and metal markets has increased. This study measures the influence of the crude oil market on non-energy commodity markets before and after the 2008 financial crisis. By introducing the US dollar index as exogenous shocks, we investigate price and volatility spillover between commodity markets by constructing a bivariate EGARCH model with time-varying correlation construction. The results reveal that the crude oil market has significant volatility spillover effects on non-energy commodity markets, which demonstrates its core position among commodity markets. The overall level of correlation strengthened after the crisis, which indicates that the consistency of market price trends was enhanced affected by economic recession. In addition, the influence of the US dollar index on commodity markets has weakened since the crisis.     

Does market-based electricity price affect China's energy efficiency?

China is in a critical period of market-oriented reform and energy transition. As a crucial means to regulate supply and demand under the market-oriented mechanism, the electricity price can promote the development of energy efficiency by optimizing resource allocation. With the gradual increase in electricity consumption, the influence of its price on energy consumption is also gradually enhanced. Therefore, this paper evaluated the process of electricity price marketization and conducted a spatial-temporal comparative analysis of the effect of electricity price on energy efficiency by controlling economic, policy, and other price factors. The results show that: (1) the marketization degree of China's electricity price has improved with steady steps; (2) market-oriented electricity price has a stable positive correlation with energy efficiency in both the short and long term; (3) marketization improves the promotion effect of electricity price on energy efficiency, and the influence of electricity price is more significant in the eastern region with a high degree of marketization and the subsequent stage; (4) the impact of market-oriented electricity price on energy efficiency is asymmetric. The impulse response under positive and negative shock is opposite, and under the positive shock, the response time is longer, and the degree is greater.     

What drives the commodity price beta of oil industry stocks?

We test theoretical drivers of the oil price beta of oil industry stocks. The strongest statistical and economic support comes for market conditions-type variables as the prime drivers: namely, oil price (+), bond rate (+), volatility of oil returns (−) and cost of carry (+). Though statistically significant, exogenous firm characteristics and oil firms' financing decisions have less compelling economic significance. There is weaker support for the prediction that financial risk management reduces the exposure of oil stocks to crude oil price variation. Finally, extended modelling shows that mean reversion in oil prices also helps explain cross-sectional variation in the oil beta.     

Interpreting the oil risk premium: Do oil price shocks matter?

This paper analyzes the link between the economic fundamentals of the global crude oil markets and the oil futures risk premium. The compensation for risk required by speculators in the oil futures market is modelled as part of the endogenous transmission of oil price shocks. The empirical approach is based on a Structural Vector Autoregressive model of the international market for crude oil. The dynamic response functions show a negative relationship between the risk premium and the real price of oil, triggered by shocks to economic fundamentals. Moreover, the expected returns of a long futures investment are largely explained by a specific shock component related to oil speculators and a shift in the global demand for crude oil.     

Does the source of oil price shocks matter for South African stock returns? A structural VAR approach

In this paper, we investigate the dynamic relationship between different oil price shocks and the South African stock market using a sign restriction structural VAR approach for the period 1973:01 to 2011:07. The results show that for an oil-importing country like South Africa, stock returns only increase with oil prices when global economic activity improves. In response to oil supply shocks and speculative demand shocks, stock returns and the real price of oil move in opposite directions. The analysis of the variance decomposition shows that the oil supply shock contributes more to the variability in real stock prices. The main conclusion is that different oil price shocks affect stock returns differently and policy makers and investors should always consider the source of the shock before implementing a policy and making investment decisions.     

Does the U.S. economic policy uncertainty connect financial markets? Evidence from oil and commodity currencies

We provide novel insight to the emerging literature on the role of U.S. monetary policy as a driver of a global financial cycle by examining the possible causal effect of U.S. economic policy uncertainty on the connectedness of crude oil and currency markets, using a sample of commodity currencies from advanced and emerging nations. A battery of linear and nonlinear Granger-based causality tests indicate the presence of a causal relationship between economic policy uncertainty and the connectedness of oil and currency markets, particularly at low frequencies and more significantly after the outburst of the global financial crisis. While crude oil generally serves as a net transmitter of shocks to currencies across all frequency bands, the spillover effects from oil are largely concentrated towards the G10 currencies of Australian and New Zealand dollar that are often used as investment currencies in global carry trade strategies. Overall, our findings suggest the presence of a significant pass-through effect of economic policy uncertainty via oil prices, spilling over to the currency market, in line with the emerging evidence that the monetary policy by the U.S. Fed serves as a major driver of a global financial cycle that describes patterns in global capital flows, credit activity and asset prices across financial markets.     

Does centralized residence promote the use of cleaner cooking fuels? Evidence from rural China

The Chinese government has implemented the rural centralized residence (RCR) policy to promote rural development in 24 provinces since 2005. This study aims to estimate the effects of RCR on households' choice of clean cooking fuels by applying the instrumental variable approach on a dataset with 3685 observations in Sichuan Province. The empirical analysis showed that RCR has a significant positive effect on the choice of clean cooking fuels. We also found that RCR makes farmer households shift from using non-clean energy to clean energy for cooking by increasing both their total income and the cost of collecting and storing traditional fuels. Peer effects also motivate households to use clean cooking fuels. Further analysis indicates that an increase in the expenditure on clean energy due to RCR does not increase the farmer households' living burden, since the increase in the total income caused by RCR is much greater. Considering the accessibility and affordability of clean energy, the RCR policy could improve the standards of living among rural residents and synergistically promote energy transition in rural China.     

Dynamic structure of the spot price of crude oil: does time aggregation matter?

This paper assesses nonlinear structures in the time series data generating mechanism of crude oil prices. We apply well-known univariate tests for nonlinearity, with distinct power functions over alternatives, but with different null hypotheses reflecting the existence of different concepts of linearity and nonlinearity in the time series literature. We utilize daily data on crude oil spot price for over 26 years, as well as monthly data on crude oil spot price for 41 years. Investigating the monthly price of crude oil along with the daily price distinguishes the approach of this paper from existing studies focusing on the time series structure of crude oil price. All the tests detect strong evidence of general nonlinear serial dependence, as well as nonlinearity in the mean, variance, and skewness functions in the daily spot price of crude oil. Since evidence of nonlinear dependence is less dramatic in monthly observations, nonlinear serial dependence is moderated by time aggregation in crude oil prices but not significantly.     

Examining crude oil price – Exchange rate nexus for India during the period of extreme oil price volatility

This study probes crude oil price – exchange rate nexus for India using daily data for the time span July 2, 2007–November 28, 2008. Generalized autoregressive conditional heteroskedasticity (GARCH) and exponential GARCH (EGARCH) models have been employed to examine the impact of oil price shocks on nominal exchange rate. The study reveals that an increase in the oil price return leads to the depreciation of Indian currency vis-à-vis US dollar. The study also establishes that positive and negative oil price shocks have similar effects, in terms of magnitude, on exchange rate volatility and oil price shocks have permanent effect on exchange rate volatility.     

Slow oil shocks and the “weakening of the oil price–macroeconomy relationship”

Many papers have been documenting and analysing the asymmetry and the weakening of the oil price–macroeconomy relationship as off the early eighties. While there seems to be a consensus about the factors causing the asymmetry, namely adjustment costs which offset the benefits of low energy prices, the debate about the weakening of the relationship is not over yet. Moreover, the alternative oil price specifications which have been proposed by Mork (1989), Lee et al. (1995), and Hamilton (1996) to restore the stability of the relationship fail to Granger cause output or unemployment in post-1980 data. By using the concept of accelerations of the oil price, we show that the weakening of this relationship corresponds to the appearance of slow oil price increases, which have less impact on the economy. When filtering out these slow oil price variations from the sample, we manage to rehabilitate the causality running from the oil price to the macroeconomy and show that far from weakening, the oil price accelerations–GDP relationship has even been growing stronger since the early eighties.     

Is the recent low oil price attributable to the shale revolution?

The U.S. Energy Information Administration estimates that approximately 52% of total U.S. crude oil was produced from shale oil resources in 2015. We examine whether the recent low crude oil price is attributable to this shale revolution in the U.S., using a SVAR model with structural breaks. Our results reveal that U.S. supply shocks are important drivers of real oil price and, for example, explain approximately a quarter of the 73% decline between June 2014 and February 2016. Failure to consider statistically significant structural changes results in underestimating the role played by global supply shocks, while overestimating the role of the demand shocks.     

Do manufacturing firms react to energy prices? Evidence from Italy

The reaction of energy demand to price changes is a key policy issue as it describes the economy's response to changes in market conditions or to policy interventions. The issue is even more important for the Italian economy, highly exposed to energy price changes, given its almost complete fossil fuel-related energy dependence, environmental sensitivity and highly fragmented industrial structure. Besides the policy issue, there is also an important methodological debate, concerning the best way to evaluate energy demand elasticities, looking at alternative models, data and elasticity definitions. After a discussion of the main methodological issues and the related empirical literature, this paper presents an estimation of factor and fuel demand elasticities for Italian industrial firms, by using a microeconomic panel in a two-stage translog model. Using cross-price and Morishima elasticities, we obtain information on the magnitude and asymmetry of firms' responses to price changes. Moreover, the use of a micro-dataset allows the high heterogeneity of Italian firms to be considered: the results are discussed according to technology intensity, sector and firm size. Our findings show that energy is the most elastic input for all sectors and that capital and energy are substitutes in the low technology sector and weak complements in all others. Estimated interfuel elasticities show a high degree of demand sensitivity to fuel price changes and the vast majority of cross-price elasticities exhibit substitutability. Appropriate fiscal policies can thus be identified to give an effective impulse in influencing the industrial energy mix by changing relative prices. These findings constitute an important foundation for analysing energy demand by Italian industrial firms, given that empirical literature is particularly rare on the Italian case study.     

Does corporate R&D investment affect firm environmental performance? Evidence from G-6 countries

The rate of climate change due to global warming has become a substantial concern and appeared as a real-world phenomenon in the recent years. However, it is imperative to know how business enterprises alter such concern. Recent studies involve a variety of firm-level factors to create a robust link between business enterprises' environmental and financial performance. However, little is known regarding the role of research and development (R&D) investment on firms' environmental performance. Using a firm-level data for the period 2004–2016 from G-6 countries, this study empirically investigates how R&D investment affects the firm environmental performance measured by energy and carbon emissions intensities. We find that R&D investment improves the firm's environmental performance consistent with the theoretical argument of natural resource-based view (NRBV). Our findings are robust to alternative econometric specifications, alternative variable specifications, and sub-samples. Our findings offer novel insights to the policymakers, business managers, and regulators.     

On the intraday dynamics of oil price and exchange rate: What can we learn from China and India?

The main aim of this paper is to investigate the volatility determinants of crude oil and foreign exchange markets and jump spillover between them. We consider currencies of two major oil-importing countries (India and China) over the sample period of January 1, 2013 to October 31, 2019. We find evidence of positive return spillover from the oil to the foreign exchange market; however, there is a lack of return spillover in the other direction. Oil jumps appear to have a negative impact on exchange rate conditional volatility, and the latter responds asymmetrically to disentangled (positive and negative) oil price jumps. We also report disentangled exchange rate jumps' significant impact on conditional oil price volatility. These results, however, are asymmetric based on the nature of jumps and alternative oil price series. Finally, we do not find evidence of co-jump between the oil and foreign exchange markets. These results have important implications for investors and policymakers.     

Is there a price premium for energy efficiency labels? Evidence from the Introduction of a Label in Korea

This study examines the price premium from Korea's Energy Efficiency Grade Label. The Korean government recently began energy certification of televisions, providing a setting to analyze a possible price effect of the new label. Hedonic regression results seem to show that a price premium exists for products with the Energy Efficiency Grade Label. However, potential unobserved heterogeneity is a concern. Difference-in-difference and fixed-effects models are used to capture the net effect of the label by controlling for time and product differences. The results suggest that any price premium does not result from the energy efficiency label itself. Instead, energy-efficient products already had higher prices before the introduction of the energy efficiency label. The finding turns our attention to the importance of careful design of labeling programs.     

What is behind the increase in oil prices? Analyzing oil consumption and supply relationship with oil price

The continuing increases in oil prices have renewed the argument over the real culprits behind these movements. The growth in demand for oil in international markets, especially from the United States and China, is often identified as the main source of consumption pressure on prices, and thus the upward trend in oil prices. This paper uses unit root tests with two endogenous breaks to analyze the characteristics of oil prices, production, and consumption for several countries. By taking into account structural breaks, we find that many countries’ oil consumption and oil prices are stationary, while other countries are not. We also perform causality tests to determine the direction of any possible relationship between oil price and oil consumption and production. Our statistical analysis reveals that production variables cause oil prices, while oil prices tend to cause consumption. As a result, we claim that the blame for the recent fluctuations in oil prices is more appropriately associated with supply factors, not consumption influences.