Long-term swings and seasonality in energy markets

Manuel Moreno, Alfonso Novales and Federico Platania

European Journal of Operational Research, 2019, vol. 279, issue 3, 1011-1023

Abstract: This paper introduces a two-factor continuous-time model for commodity pricing under the assumption that prices revert to a stochastic mean level, which shows smooth, periodic fluctuations over long periods of time. We represent the mean reversion price by a Fourier series with a stochastic component. We also consider a seasonal component in the price level, an essential characteristic of many commodity prices, which we represent again by a Fourier series. We obtain analytical pricing expressions for futures contracts. Using futures price data on Natural Gas, we provide evidence on the presence of long-term fluctuations and show how to estimate the long-term component simultaneously with a seasonal component using the Kalman filter. We analyse the in-sample and out-of-sample empirical performance of our pricing model with and without a seasonal component and compare it with Schwartz and Smith (2000) model. Our findings show the in-sample and out-of-sample superiority of our model with seasonal fluctuations, thereby providing a simple and powerful tool for portfolio management, risk management, and derivative pricing.

Keywords: Finance; Energy markets; Seasonality; Long-term swings; Kalman filter (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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Working Paper: Long-term swings and seasonality in energy markets (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:279:y:2019:i:3:p:1011-1023

DOI: 10.1016/j.ejor.2019.05.042

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