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Anatomy of Risk Premium in UK Natural Gas Futures

Author

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  • Beatriz Martínez

    (Department of Business Finance, University of Valencia)

  • Hipòlit Torró

    (Financial and Actuarial Economics, University of Valencia)

Abstract

In many futures markets, trading is concentrated in the front contract and positions are rolled-over until the strategy horizon is attained. In this paper, a pair-wise comparison between the conventional risk premium and the accrued risk premium in rolled-over positions in the front contract is carried out for UK natural gas futures. Several novel results are obtained. Firstly, and most importantly, the accrued risk premium in rollover strategies is significatively larger than conventional risk premiums and increases with the time to delivery. Specifically, for strategy horizons between three and six months, this difference increases from 1% to 10%. Secondly, it is the first time that risk premium in day-ahead futures has been measured in this market. The average value of the day-ahead risk premium is 0.5% per day and it is statistically significant. Thirdly, all risk premiums are significantly larger and more volatile in winter. Finally, risk premium time-variation is analyzed using a regression model. It is shown that reservoirs, weather, liquidity, volatility, skewness, and seasons are able in all cases to explain between 21% and 59% of the risk premium time-variation (depending on the futures maturity and sub-period).

Suggested Citation

  • Beatriz Martínez & Hipòlit Torró, 2016. "Anatomy of Risk Premium in UK Natural Gas Futures," Working Papers 2016.06, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2016.06
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    References listed on IDEAS

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    More about this item

    Keywords

    Natural Gas Market; Futures Premium; Rollover; Seasonal Risk Premiums;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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