The Stochastic Seasonal Behaviour of Natural Gas Prices

34 Pages Posted: 19 May 2012

See all articles by Andrés García Mirantes

Andrés García Mirantes

affiliation not provided to SSRN

Francisco Javier Población García

European Central Bank (ECB)

Gregorio Serna

University of Castilla, La Mancha

Date Written: June 2012

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 non‐seasonal 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.

Keywords: stochastic calculus, seasonality, commodity prices, Kalman filter, natural gas

JEL Classification: C32, C51, C60, G13

Suggested Citation

Mirantes, Andrés García and Población García, Francisco Javier and Serna, Gregorio, The Stochastic Seasonal Behaviour of Natural Gas Prices (June 2012). European Financial Management, Vol. 18, Issue 3, pp. 410-443, 2012, Available at SSRN: https://ssrn.com/abstract=2062686 or http://dx.doi.org/10.1111/j.1468-036X.2009.00533.x

Andrés García Mirantes (Contact Author)

affiliation not provided to SSRN

No Address Available

Francisco Javier Población García

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gregorio Serna

University of Castilla, La Mancha ( email )

Plaza Universidad, 1
02071 Albacete, Ciudad Real 13071
Spain

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