The Stochastic Seasonal Behaviour of Natural Gas Prices

Abstract

Previous studies have explored the seasonal behaviour of commodity prices as a deterministic factor. This paper goes further by proposing a general (n+2m)-factor model for the stochastic behaviour of commodity prices, which nests the deterministic seasonal model by Sorensen (2002). We consider seasonality as a stochastic factor, with n non-seasonal and m seasonal factors. The nonseasonal factors are as defined in Schwartz (1997), Schwartz and Smith (2000) and Cortazar and Schwartz (2003). The seasonal factors are trigonometric components generated by stochastic processes. The model has been applied to the Henry Hub natural gas futures contracts listed by NYMEX. We find that models allowing for stochastic seasonality outperform standard models with deterministic seasonality. We obtain similar results with other energy commodities. Moreover, we find that stochastic seasonality implies that the volatility of futures returns follows a seasonal pattern. This result has important implications in terms of option pricing. This paper is the sole responsibility of its authors. The views represented here do not necessarily reflect those of the Banco de España. We thank John Doukas (the editor), an anonymous referee,

A Stochastic Factor Model for Risk Management of Commodity Derivatives

“…In recent times, stochastic models of commodity futures prices have played a central role in evaluating commodity-related securities among academics and practitioners, such as Schwartz (1997), Schwartz and Smith (2000), Sorensen (2002), Cortazar and Schwartz (2003), Cortazar and Naranjo (2006), Mirantes, Poblacion andSerna (2012), Carmona andCoulon (2014), and et al. A detailed survey of these types of models is written by Pirrong (2011).…”

An Analysis of the Fish Pool Market in the Context of Seasonality and Stochastic Convenience Yield

“…West (2012) adopted a multi-factor seasonal Nelson-Siegel model to obtain estimates for seasonal commodity prices. Mirantes, Población, and Serna (2013) mainly focus on the convenience yield and use the four-factor model proposed by Mirantes, Población, and Serna (2012) to capture mean-reversion and stochastic seasonality of convenience yield. In our model, the seasonality factor is embedded in the drift term of convenience yield as a function of calendar time.…”

Commodity derivative valuation under a factor model with time-varying market prices of risk

“…Firstly, here we are using weekly data. Secondly, a stochastic volatility model with jumps is probably more realistic, but also more complex so much the Kalman filter formulae cannot be computed explicitly in an exact way and it is necessary the use of approximations, such as the extended Kalman filter, whereas all the formulae in this article are exact.5 The exact expression for the futures price under theSchwartz and Smith (2000) two-factor model with seasonal factors can be found inMirantes et al (2012a).…”

“…2Sorensen (2002) suggests introducing into the model a deterministic seasonal component for agricultural commodities. Here, we use Sorensen's proposal for heating oil, gasoline and natural gas, which present a strong seasonal behavior (see, for example,Mirantes et al 2012a).…”