[UCP, Tu 9:00] Uncertainty and Company Performance

1.The Link between Oil Price Movements and the Performance of Renewable Energy Companies - A State Space Model Approach (Inchauspe, Trück)

We investigate the effects of changes in the crude oil price on stock returns of renewable energy companies. As a recent UNEP study reports, capital flowing into renewable energy climbed to a record high in recent years, while investors are expecting to make a respectable profit as returns on green investments seem to be rising. Overall, one should expect that various factors like global warming, restricted oil supplies, increased global demand, and political insecurity in some of the oil producing countries and will not only lead to rising oil prices but also to a greater demand and supply of alternative energy sources. In our study, we examine different benchmark indices for the renewable or alternative energy sector including companies from various industries like fuel cells, photovoltaics, biomass etc. The time period considered includes data from January 2001 to December 2008 and can be split into different subperiods: from January 2001 to December 2003 when the oil price remained relatively constant around a level of 30 USD, the period from January 2004 to February 2007 when the oil prices showed an overall tendency to increase up to 60 USD, the period from March 2007 to July 2008 when an extreme increase in the prices up to 140 USD could be observed and finally the dramatic drop in oil prices during the second half of the year 2008. Using a state space model and approaches based on the capital asset pricing model (CAPM) and a multiple regression factor type model, we analyse the estimated coefficients and systematic risk for the renewable energy indices relative to the market performance. We former investigate the effects of our results on risk management strategies and portfolio diversification, using different risk measures like VaR or Expected Shortfall. Our results are ambiguous and do not support the assumption that during times of oil price shocks higher investments and returns can be obtained from renewable energy stocks. On the other hand we find a more significant influence of oil prices on renewable energy stocks when the former are steeply increasing or falling what at least partially confirms results by earlier studies.

2.Do Trading and Power Operations Mix? The Case of Constellation Energy Group’s Liquidity Crisis of 2008 (Parsons)

Abstract: Constellation Energy has been a leading performer in the merchant power business since 2001. The company ran a sophisticated risk management and trading operation in electric power and related commodities. In August and September of 2008, Constellation experienced a major liquidity crisis that saw its stock price fall by nearly three-quarters. In an emergency search for cash, it was forced to agree to sell itself at the low price. This paper analyzes the proximate causes driving up Constellation’s VAR and precipitating its liquidity crisis. These include an expansion of the scale of its trading operations into new commodity lines, an increase in the VAR per unit of the commodities traded due to the dramatically rising commodity prices, an increase in credit risk due to the changing composition of its counterparties, and an increase in contracts with provisions for contingent capital calls. Why was this increase in VAR allowed to occur? The paper analyzes the changes in Constellation’s corporate strategy that relied upon an expansion in the commodities trading business, and it shows how the company erred in evaluating the profitability and risks of the trading operation. The paper shows that the trading operations relied upon an unpriced claim on Constellation’s balance sheet,
underming the company’s total financial stability. The paper concludes by comparing the problem at Constellation to earlier incidents in the electric power trading business.