A multi-factor model with time-varying and seasonal risk premiums for the natural gas market

Chengwu Shao, Ramaprasad Bhar and David B. Colwell

Energy Economics, 2015, vol. 50, issue C, 207-214

Abstract: In this paper, we develop a quantitative model of the US natural gas market that explores its multi-factor structure and its time-varying and seasonal risk premiums. With weekly spot and futures prices we show that three factors are preferred to describe the futures term structure, and the time-varying risk premiums are also significant. Moreover, we found that the market implies a seasonal risk premium with two peaks and troughs in one year, which is important to correctly price the futures by maturity month. Finally, we link this seasonal risk premium to the uncertainty of the US natural gas demand and find a positive relationship between them. These results reveal the complex aspect of the market, and may have useful applications for other commodity sectors.

Keywords: Natural gas; Short-term and long-term factors; Risk premium; Seasonality (search for similar items in EconPapers)
JEL-codes: C32 G13 Q40 Q43 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:50:y:2015:i:c:p:207-214

DOI: 10.1016/j.eneco.2015.04.013

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