Abstract

http://ssrn.com/abstract=1645202
 
 

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Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas


Remco Van Eijkel


University of Groningen

José Luis Moraga-González


University of Navarra, IESE Business School; University of Groningen

June 21, 2010

IESE Business School Working Paper No. 864

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 at explaining the observed firms' (inverse) hedge ratios. In addition, the data lend support to the existence of a learning effect by wholesalers.

Number of Pages in PDF File: 42

Keywords: market power, risk-hedging, forward contracts, spot market, over-the-counter trade, market transparency, churn rates

JEL Classification: D43, L13, G13, L95

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Date posted: July 21, 2010  

Suggested Citation

van Eijkel, Remco and Moraga-González, José Luis, Do Firms Sell Forward for Strategic Reasons? An Application to the Wholesale Market for Natural Gas (June 21, 2010). IESE Business School Working Paper No. 864. Available at SSRN: http://ssrn.com/abstract=1645202 or http://dx.doi.org/10.2139/ssrn.1645202

Contact Information

Remco Van Eijkel (Contact Author)
University of Groningen ( email )
P.O. Box 800
9700 AH Groningen
Netherlands
José Luis Moraga-González
University of Navarra, IESE Business School ( email )
Avenida Pearson 21
Barcelona, 08034
Spain
University of Groningen
P.O. Box 800
9700 AV Groningen
Netherlands
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