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Risk premium in the UK natural gas forward market

Ingrid Hobæk Haff, Ola Lindqvist and Anders Løland

Energy Economics, 2008, vol. 30, issue 5, 2420-2440

Abstract: This report investigates the UK natural gas market, and tests whether it is a fair-game efficient forward market, using forward contracts ranging from one to five months time to delivery. The forward and spot price series are separately non-stationary, but cointegrated. Furthermore, the forward prices are biased predictors of both the future spot and the 1-month-ahead forward price. The risk premium on the forward prices is positive, as opposed to the US gas market, where the risk premium was found to be negative in similar work. Moreover, the analysis reveals that the storage model is an incomplete model for the relationship between the spot and forward prices. However, storage has a clear effect on this relationship, an effect that appears to be non-linear.

Date: 2008
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