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Long-term swings and seasonality in energy markets

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Moreno, Manuel and Novales Cinca, Alfonso and Platania, Federico (2019) Long-term swings and seasonality in energy markets. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 29, 2019, ISSN: 2341-2356 ]

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Abstract

This paper introduces a two-factor continuous-time model for commodity pricing under the assump- tion 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 si- multaneously 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 the 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.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Finance; Energy Markets; Seasonality; Long-term swings; Kalman filter.
Subjects:Sciences > Mathematics > Stochastic processes
Sciences > Statistics > Commercial research
Social sciences > Economics > Econometrics
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2019
Number:29
ID Code:57379
Deposited On:16 Oct 2019 11:00
Last Modified:17 Oct 2019 10:58

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