Gas Storage Valuation and Hedging: A Quantification of Model Risk

Patrick Hénaff, Ismail Laachir and Francesco Russo
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Patrick Hénaff: IAE Paris, Université Paris I-Panthéon Sorbonne, 75006 Paris, France
Ismail Laachir: Ismail Laachir, Zeliade Systems, 56 Rue Jean-Jacques Rousseau, 75001 Paris, France
Francesco Russo: Francesco Russo, ENSTA ParisTech, Unité de Mathématiques Appliquées, 91120 Palaiseau, France

IJFS, 2018, vol. 6, issue 1, 1-27

Abstract: This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The contributions of this paper are two-fold. Firstly, we propose a model that unifies the dynamics of the futures curve and spot price, and accounts for the main stylized facts of the US natural gas market such as seasonality and the presence of price spikes in the spot market. Secondly, we evaluate the associated model risk, and show not only that the valuation is strongly dependent upon the dynamics of the spot price, but more importantly that the hedging strategy commonly used in the industry leaves the storage operator with significant residual price risk.

Keywords: energy markets; commodities; natural gas storage; model uncertainty (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jijfss:v:6:y:2018:i:1:p:27-:d:134807

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