Principal Investigator:
Lisa Yang, Ph.D., M.Sc., B.Sc., Assistant Professor, Jake Jabs College of Business
and Entrepreneurship
Abstract
Regulators have emphasized timely and accurate information release as an essential
channel for reducing information asymmetry and enhancing efficient pricing in energy
markets. This project attempts to assess the importance of the U.S. Energy Information
Administration(EIA) announcements of oil and gas storage on energy markets. In particular, we examine
the impacts of the EIA storage announcements on energy prices, analyst uncertainty
about future storage levels, and market uncertainty about future oil and gas prices.
Results from our study will shed light on the efficiency of EIA information release
on energy pricing and suggest implications for policy-makers to improve the process
of information producing and gathering and thus enhance pricing efficiency.
Specific Aims
The U.S. Energy Information Administration(EIA)was created in response to the need for additional Federal initiatives to collect
and disseminate energy-related information, and to evaluate and analyze this information.
Since the first law to address the needs to respond to the energy crises of the 1970s,
many subsequent laws have contributed to EIA's evolution and growth. Now EIA is the
single largest source of energy information available, which is independent from the
rest of the Department of Energy.
Since the financial crisis of 2007, the energy markets have been found increasingly
related to financial markets. Market participants not only buy and sell physical quantities
of oil and gas, but also trade contracts for the future delivery of energy derivatives.
Moreover, banks, hedge funds, commodity trading advisors, and other money managers-who
often do not have interests in trading physical oil-are also active in the market
for energy derivatives to try to profit from changes in prices. In recent years, investors
have also shown interest in adding energy and other commodities as alternatives to
equity and bond investments to diversify their portfolios or to hedge inflation risks.
According to EIA, the correlation between energy markets and stock markets is more
than 0.4, and sometimes over 0.65.[1] Moreover, professional financial analysts begin to forecast the storage, as a result
of the increased interests in energy markets by financial investors and institutions.
Due to the high correlation between energy and financial markets, DOE required EIA
to establish an annual survey to gather and report detailed energy industry financial
data. Among other aims, the regulator particularly seeks to discouragevolatility of prices, reduce market uncertainty, and enhance pricing efficiency.
This project aims to assess how the EIA information releases impact the pricing efficiency
in energy markets, in particular, the natural gas and oil markets. As regulators and
EIA endeavor to increase information transparency and publish timely scheduled announcements,we would expect that EIA’s announcements have significant informational contents for
energy market prices and reduce analyst and market uncertainty. Specifically, the investigators use the professional analyst forecasts as tool to
test the impact of EIA storage announcements. As familiar with financial market research,
we take the difference between the EIA announced and analyst consensus forecasted
storage as“announcement surprises”. We explore the price discovery and informational efficiency on the energy
markets and how the reaction to the announcement surprises is conditioned on characteristics
of the analysts’ forecasts. Theyhypothesize that if EIA’s announcements have informational contents, then market price
would react significantly to announcement surprises.We will further explore how EIA announcements and forecast errors influence both analyst
uncertainty about future storage flows and investor uncertainty about future energy
prices.We hypothesize that if EIA’s scheduled announcements enhance price efficiency, then
the storage level uncertainty is resolved and hence the uncertainty(measuredfrom option price) about future prices should generally be reduced.
Significance of the Project
The energy regulators particularly seek to discouragevolatility of prices, reduce market uncertainty, and reform markets if needed. Therefore, the
significance of our intended work for regulatory authorities will be 1) to provide
empirical evidence on whether the scheduled EIA announcements have informational contents
for energy pricing; 2) to have policy implications for the ongoing regulatory changes
that aim to stabilize energy prices and reduce market uncertainty; 3) to have policy
implications for regulating financial investments on energy commodities and derivatives
by financial institutions, given the increasing correlation between energy market
and financial market.
References
DeWally,M.,L.Ederington,and C. Fernando.(2013).Determinants of trader profits in commodity futures markets,”Review of Financial Studies, 26, pp. 2648-2683
Ederington, L. H., Guan, W., & Yang, L.(2015).Bond Market Event Study Methods.Journal of Banking and Finance, 58, pp. 281-293.
Yang,L., J. Goh,and C. Chiyachantana.(2016). Valuation Uncertainty, Market Sentiment and the Informativeness of Institutional
Trades.Journal of Banking and Finance, 72, pp.81-98.
Alderson, M. J., Lin, F., & Stock, D. R.(2017).Does the choice between fixed price and make whole call provisions reflect differential
agency costs?.Journal of Corporate Finance,46, 442-460.
- https://www.eia.gov/finance/markets/crudeoil/financial_markets.php
