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The co-movements along the forward curve of natural gas futures: a structural view

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Author Info

  • Spargoli, Fabrizio

    ()
    (Universitat Pompeu Fabra and Università Politecnica delle Marche)

  • Zagaglia, Paolo

    ()
    (Bank of Finland Research and Stockholm University)

Abstract

This paper studies the co-movements between the daily returns of forwards on natural gas traded in the NYMEX with maturity of 1, 2 and 3 months. We identify a structural multivariate BEKK model using a recursive assumption whereby shocks to the volatility of the returns are transmitted from the short to the long section of the forward curve. We find strong evidence of spillover effects in the conditional first moments, for which we show that the transmission mechanism operates from the shorter to the longer maturity. In terms of reduced form conditional second moments, the shortest the maturity, the higher the volatility of the return, and the more the returns become independent from the others and follow the dynamics of the underlying commodity. The evidence from the structural second moments indicates that the longer the maturity is, the higher the uncertainty about the returns. We also show that the higher the structural variance of a maturity relative to that of another maturity, the stronger the correlation between the two.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0826netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 26/2008.

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Length: 32 pages
Date of creation: 18 Nov 2008
Date of revision:
Handle: RePEc:hhs:bofrdp:2008_026

Contact details of provider:
Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: natural gas prices; forward markets; GARCH; structural VAR;

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Cited by:
  1. Paolo Zagaglia & Massimiliano Marzo, 2013. "Gold and the U.S. dollar: tales from the turmoil," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 571-582, March.

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