Journal of Energy Markets

Derek W. Bunn
London Business School

The papers in this issue of The Journal of Energy Markets look at various aspects of the structural dynamics in energy markets.

In the issue’s first paper, “Dynamic connectedness between energy markets and cryptocurrencies: evidence from the Covid-19 pandemic” by Murad Harasheh, Ahmed Bouteska and May H. Hammad, the impact of a major shock (Covid-19) reveals new insights into the connectedness of markets. In particular, Harasheh et al investigated the connectedness between cryptocurrencies and various international energy markets from 2018 to 2021. They used a time-varying parameter vector autoregression approach. Net total directional connectedness tests suggested that the cryptocurrency and energy indexes had heterogeneous roles. Bitcoin and Ripple coin were net receivers of shocks, while Ethereum switched from being a net receiver to a net transmitter. The US energy market was a persistent net transmitter of shocks, while the Asian energy markets were consistent net shock receivers. The authors use these results to provide insights for portfolio optimization and policy.

In contrast, looking at structural change in the capacity mix in the second paper in this issue,“Incremental wind energy development in the Midcontinent Independent System Operator electricity markets of the United States”, Han S. Qi, Kang Hua Cao, Chi Keung Woo and Raymond Li project how much incremental wind energy development may occur without causing inadequate investment incentives (also known as “missing money”). They focus on wind and natural-gas-fired generation in the day-ahead market and the real-time market of the Midcontinent Independent System Operator (MISO) in the United States. Using a large sample of hourly data for the 82-month period from January 1, 2014 to October 31, 2020, they find that the day-ahead market’s hourly investment incentives move with the day-ahead forecast of daily natural gas prices; with MISO’s day-ahead hourly requirements of ancillary services; with MISO’s zonal day-ahead hourly schedules of nuclear generation, wind generation and must-run generation; and with MISOs zonal day-ahead forecasts of hourly loads. The real-time market’s analysis is similar. Further, the negative effect of incremental wind energy development on investment incentives over the forward-looking period of 2023–42 is offset by the positive effect of a rising natural gas price, nuclear plant retirement, declining must-run generation and growing demand.

Finally, in “News-driven bubbles in futures markets”, Heng-Guo Zhang and Tailong Li report new findings on the relationship between news-driven trade war expectations and energy market price bubbles. It is apparent that when trade war expectations, policy news, trading volume and cashflow all have positive causal effects on asset prices at the same time, bubbles often occur. When these four factors have a negative causal effect on asset prices at the same time, there are generally no bubbles. When the four factors have both positive and negative causal effects on asset prices, investors exhibit signs of wavering in their demand for risky assets. Zhang and Li observe that several crude oil futures from China’s futures market have experienced bubbles associated with trade war news information and news-driven trade war expectations, which are consistent with these indications.