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Pricing dynamics of natural gas futures

Bingxin Li

Energy Economics, 2019, vol. 78, issue C, 91-108

Abstract: Growth in the natural gas market is pronounced since the shale gas boom. Natural gas has become increasingly important in international trade, especially after the recent financialization in commodity markets. Motivated by the high volatility and time-varying nature in natural gas futures prices, understanding the pricing dynamics of natural gas is essential for risk management. In this paper, we adopt a class of computationally efficient discrete-time pricing models and construct futures dynamics by differentiating three subsamples which represent time-varying market conditions. We find strong evidence of positive jumps in the natural gas market and higher jump intensity in a more volatile period. The dynamic jump intensity model has a better model fit both in-sample and out-of-sample, suggesting time-varying jumps are necessary for pricing natural gas derivatives.

Keywords: Natural gas; Futures; Discrete-time model; Jump (search for similar items in EconPapers)
JEL-codes: G1 G12 G13 (search for similar items in EconPapers)
Date: 2019
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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Handle: RePEc:eee:eneeco:v:78:y:2019:i:c:p:91-108