City Research Online

Abstract

Japan is one of the largest importers of different types of energy commodities in the world due to the lack of domestic energy resources. Tokyo Commodity Exchange (TOCOM) plays an important role for participants in the energy markets in Japan, since it is one of the main commodity exchanges for energy futures. However, majority of studies on energy futures focus on NYMEX and ICE prices and there seems to be no systematic studies on TOCOM energy futures. Hence, we consider investigating the dynamics and the behaviour of TOCOM energy futures and its market microstructure. We study three most liquid energy futures contracts in TOCOM, namely gasoline, kerosene and crude oil, over six consecutive months with the aim to address three main questions. First, we analyse the dynamics of energy futures contracts by modelling the realised volatility with consideration of high- and low-volatility regimes. The in-sample results support that volatility of TOCOM energy futures is regime-dependent, while the results of out-of-sample are mixed. Next, we set up a framework to analyse the behaviour of TOCOM energy futures contracts by investigating the relation between trading volume and price volatility under different market conditions defined by the shape/slope of forward curve. Both contemporaneous and lead-lag relation between trading volume and volatility are found significantly positive, while the latter is weaker. The asymmetric effect of market conditions is different from commodities due to the use of underlying commodities. Kerosene futures participants are more sensitive when market is in contango while crude oil futures participants are more sensitive in backwardation. Finally, we study the market microstructure of TOCOM by analysing the determinants of bid-ask spread components, and examine the asymmetric impact of sell-initiated and negative-return trading volume on bid-ask spread. It is evident that trading volume and volatility are two important determinants of BAS, and sell-initiated transactions seem to happen with higher BAS. The findings of this thesis provide useful implications for risk management and trading strategy by offering dynamics of volatility and insights of market microstructure.

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School Doctoral Theses Bayes Business School > Bayes Business School Doctoral Theses

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