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Gas storage valuation and hedging. A quantification of the model risk

  • Patrick Henaff

    (IAE Paris)

  • Ismail Laachir

    (UMA)

  • Francesco Russo

    (UMA)

Registered author(s):

    This paper focuses on the valuation and hedging of gas storage facilities, using a spot-based valuation framework coupled with a financial hedging strategy implemented with futures contracts. The first novelty consist in proposing a model that unifies the dynamics of the futures curve and the spot price, which accounts for the main stylized facts of the US natural gas market, such as seasonality and presence of price spikes. The second aspect of the paper is related to the quantification of model uncertainty related to the spot dynamics.

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    File URL: http://arxiv.org/pdf/1312.3789
    File Function: Latest version
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    Paper provided by arXiv.org in its series Papers with number 1312.3789.

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    Date of creation: Dec 2013
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    Handle: RePEc:arx:papers:1312.3789
    Contact details of provider: Web page: http://arxiv.org/

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    1. Bjerksund, Petter & Stensland, Gunnar & Vagstad, Frank, 2008. "Gas Storage Valuation: Price Modelling v. Optimization Methods," Discussion Papers 2008/20, Department of Business and Management Science, Norwegian School of Economics.
    2. Les Clewlow & Chris Strickland, 1999. "A Multi-Factor Model for Energy Derivatives," Research Paper Series 28, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Ben Hambly & Sam Howison & Tino Kluge, 2009. "Modelling spikes and pricing swing options in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 9(8), pages 937-949.
    4. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 113-47.
    5. Rama Cont, 2006. "Model uncertainty and its impact on the pricing of derivative instruments," Post-Print halshs-00002695, HAL.
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