Long-Term Swings and Seasonality in Energy Markets

43 Pages Posted: 4 Jun 2016

See all articles by Manuel Moreno

Manuel Moreno

University of Castilla-La Mancha

Alfonso Novales Cinca

Universidad Complutense de Madrid

Federico Platania

University of Liege; Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV); Ecole de Management Léonard De Vinci

Date Written: June 1, 2016

Abstract

This paper introduces a continuous-time model for commodity pricing under the assumption that logged prices converge to a mean level that experiences smooth, periodic fluctuations over long periods of time. Our model incorporates that assumption by modelling the mean reversion level through a Fourier series. To validate the model, we perform an empirical study of futures prices on Natural Gas, Crude Oil, and Heating Oil. We provide evidence that such long-term fluctuations are present in the price of these energy commodities, possibly together with standard seasonal and cyclical components. We analyse the empirical performance of our pricing model versus two alternative competitors, namely, those proposed in Schwartz (1997) and Lucia and Schwartz (2002). Our findings show that our model outperforms both benchmarks, providing a simple and powerful tool for portfolio management, risk management and derivative pricing.

Keywords: Fourier series, Energy Markets, Seasonality, Periodic fluctuations, Long-term swing

Suggested Citation

Moreno Fuentes, Manuel and Novales Cinca, Alfonso and Platania, Federico, Long-Term Swings and Seasonality in Energy Markets (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2788176 or http://dx.doi.org/10.2139/ssrn.2788176

Manuel Moreno Fuentes (Contact Author)

University of Castilla-La Mancha ( email )

Cobertizo San Pedro Martir s/n
Toledo, Toledo 45071
Spain

Alfonso Novales Cinca

Universidad Complutense de Madrid ( email )

Campus of Somosaguas
Madrid
Spain

Federico Platania

University of Liege ( email )

B-4000 Liege
Belgium

Ecole Superieure d'Ingenierie Leonard de Vinci (ESILV) ( email )

92916 Paris La Defense Cedex
France

Ecole de Management Léonard De Vinci ( email )

Paris

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