Long-term swings and seasonality in energy markets

• Manuel Moreno ^[1] ; Alfonso Novales ^[2] ; Federico Platania ^[3]
  1. [1] Universidad de Castilla-La Mancha

     Universidad de Castilla-La Mancha

     Ciudad Real, España

     
  2. [2] Universidad Complutense de Madrid

     Universidad Complutense de Madrid

     Madrid, España

     
  3. [3] Pôle Universitaire Léonard de Vinci

     Pôle Universitaire Léonard de Vinci

     Arrondissement de Nanterre, Francia

     

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• Localización: Documentos de Trabajo (ICAE), ISSN-e 2341-2356, Nº. 29, 2019, págs. 1-36
• Idioma: inglés
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• Resumen

  • This paper introduces a two-factor continuous-time model for commodity pricing under the assumption 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 simultaneously 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.