Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas

Remco van Eijkel and Jose Moraga-Gonzalez
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Remco van Eijkel: University of Groningen

No D/864, IESE Research Papers from IESE Business School

Abstract: Building on a model of the interaction of risk-averse firms that compete in forward and spot markets, we develop an empirical strategy to test whether oligopolistic firms use forward contracts for strategic motives, for risk-hedging, or for both. An increase in the number of players weakens the incentives to sell forward for risk-hedging reasons. However, if strategic motives are also relevant, then an increase in the number of players strengthens the incentives to sell forward. This difference provides the analyst with a way to identify whether strategic considerations are important at motivating firms to sell forward. Using data from the Dutch wholesale market for natural gas, where we observe the number of players, spot and forward sales, and churn rates, we find evidence that strategic reasons play an important role in explaining the observed firms' (inverse) hedge ratios. The data also lend support to the existence of a learning effect by wholesalers.

Keywords: market power; risk-hedging; forward contracts; spot market; over-thecounter trade; market transparency; churn rates (search for similar items in EconPapers)
JEL-codes: D43 G13 L13 L95 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2010-06-05
New Economics Papers: this item is included in nep-bec, nep-ene and nep-rmg
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Do firms sell forward for strategic reasons? An application to the wholesale market for natural gas (2016)
Working Paper: Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas (2010)
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