Research Discussion Papers, Bank of Finland
No 26/2008:
The co-movements along the forward curve of natural gas futures: a structural view
Fabrizio Spargoli ()
and Paolo Zagaglia ()
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.
Keywords: natural gas prices; forward markets; GARCH; structural VAR; (follow links to similar papers)
JEL-Codes: C32; G19; (follow links to similar papers)
32 pages, November 18, 2008
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