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A Unified Real Options Framework for Natural Gas Storage: Integrating Market Regimes and Cross-Market Spillovers

Author

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  • Prosper Lamothe Fernández

    (Department of Finance and Commercial Research, Faculty of Economics and Business, Universidad Autónoma de Madrid, 28049 Madrid, Spain)

  • Fernando Gallardo Olmedo

    (Department of Finance and Commercial Research, Faculty of Economics and Business, Universidad Autónoma de Madrid, 28049 Madrid, Spain)

  • Hamidreza Abshenasan

    (Department of Finance and Commercial Research, Faculty of Economics and Business, Universidad Autónoma de Madrid, 28049 Madrid, Spain)

Abstract

Natural gas markets exhibit violent, non-linear volatility regimes. The 2022 energy crisis introduced persistent supply shocks and cross-Atlantic spillover effects. Traditional valuation models assume single-regime environments; consequently, they systematically misprice storage assets during extreme stress. We propose a valuation framework tailored to these specific market volatilities. By integrating a hidden Markov model (HMM) and Diebold–Yilmaz (DY) spillover indices into a stochastic dynamic programming (SDP) engine, the framework isolates the persistence of stressed market conditions. The model captures structural arbitrage opportunities. We demonstrate a 197 percent net present value (NPV) premium over conventional benchmarks using synthetic data. The optimal policy expands inventory holding periods during high spillover intensity. The algorithm executes decisions with sub-millisecond latency. This approach provides a computationally viable tool for high-frequency risk management.

Suggested Citation

  • Prosper Lamothe Fernández & Fernando Gallardo Olmedo & Hamidreza Abshenasan, 2026. "A Unified Real Options Framework for Natural Gas Storage: Integrating Market Regimes and Cross-Market Spillovers," Commodities, MDPI, vol. 5(2), pages 1-17, May.
    • Handle: RePEc:gam:jcommo:v:5:y:2026:i:2:p:11-:d:1954730
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