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European Natural Gas Seasonal Effects on Futures Hedging

Author

Listed:
  • Martínez, Beatriz
  • Torró, Hipòlit

Abstract

This paper is the first to discuss the design of futures hedging strategies in European natural gas markets (NBP, TTF and Zeebrugge). A common feature of energy prices is that conditional mean and volatility are driven by seasonal trends due to weather, demand, and storage level seasonalities. This paper follows and extends the Ederington and Salas (2008) framework and considers seasonalities in mean and volatility when minimum variance hedge ratios are computed. Our results show that hedging effectiveness is much higher when the seasonal pattern in spot price changes is approximated with lagged values of the basis (futures price minus spot price). This fact remain true for short (a week) and long (one, three and six months) hedging periods. Furthermore, volatility of weekly price changes also has a seasonal pattern and is higher in winter than in summer. A simple volatility seasonal model that is based on sinusoidal functions on the basis improves the risk reduction obtained by strategies in which hedging ratios are estimated with linear regressions. Seasonal hedging strategies, linear regression based strategies, or even a naïve position, perform better than more sophisticated statistical methods.

Suggested Citation

  • Martínez, Beatriz & Torró, Hipòlit, "undated". "European Natural Gas Seasonal Effects on Futures Hedging," Energy: Resources and Markets 198462, Fondazione Eni Enrico Mattei (FEEM).
    • Handle: RePEc:ags:feemer:198462
    DOI: 10.22004/ag.econ.198462
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    Cited by:

    1. Shrestha, Keshab & Subramaniam, Ravichandran & Rassiah, Puspavathy, 2017. "Pure martingale and joint normality tests for energy futures contracts," Energy Economics, Elsevier, vol. 63(C), pages 174-184.
    2. Chiou-Wei, Song-Zan & Chen, Sheng-Hung & Zhu, Zhen, 2020. "Natural gas price, market fundamentals and hedging effectiveness," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 321-337.
    3. Luděk Benada, 2018. "Comparison of the Impact of Econometric Models on Hedging Performance by Crude Oil and Natural Gas," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 66(2), pages 423-429.
    4. Shrestha, Keshab & Subramaniam, Ravichandran & Peranginangin, Yessy & Philip, Sheena Sara Suresh, 2018. "Quantile hedge ratio for energy markets," Energy Economics, Elsevier, vol. 71(C), pages 253-272.

    More about this item

    Keywords

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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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