A Supply and Demand Based Volatility Model for Energy Prices - the Relationship between Supply Curve Shape and Volatility

33 Pages Posted: 29 Aug 2006

See all articles by Takashi Kanamura

Takashi Kanamura

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS)

Date Written: September 17, 2006

Abstract

This paper proposes a new volatility model for energy prices explicitly characterized by the supply-demand relationship, which we call a Supply and Demand based Volatility (SDV) model. We show that the supply curve shape of energy in the SDV model produces the characteristics of the volatility in energy prices. Especially, it is found that the inverse Box-Cox transformation supply curve reflecting energy markets appropriately causes the inverse leverage effect often seen in the markets. The SDV model is also used to show that an existing (G)ARCH-M model has foundation on the supply-demand relationship. In addition, we conduct the empirical studies analyzing the volatility in the U.S. natural gas prices.

Keywords: Energy prices, volatility, supply curve, inverse Box-Cox transformation, inverse leverage effect, volatility-in-mean effect

JEL Classification: C51, L97, Q40

Suggested Citation

Kanamura, Takashi, A Supply and Demand Based Volatility Model for Energy Prices - the Relationship between Supply Curve Shape and Volatility (September 17, 2006). Available at SSRN: https://ssrn.com/abstract=926794 or http://dx.doi.org/10.2139/ssrn.926794

Takashi Kanamura (Contact Author)

Kyoto University - Graduate School of Advanced Integrated Studies in Human Survivability (GSAIS) ( email )

1, Yoshida-Nakaadachi-cho, Sakyo-ku,
Kyoto, 606-8306
Japan
81-75-762-2004 (Phone)
81-75-762-2004 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
386
Abstract Views
1,923
rank
83,430
PlumX Metrics