Weather, Inventory and Common Jump Dynamics in Natural Gas Futures and Spot Markets

31 Pages Posted: 18 Jan 2010

See all articles by Wing H. Chan

Wing H. Chan

Wilfrid Laurier University - School of Business & Economics; City University of Hong Kong (CityU) - Department of Economics & Finance

George H. K. Wang

George Mason University - Department of Finance

Li Yang

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Date Written: October 1, 2009

Abstract

This paper studies the common jump dynamics in natural gas futures and spot markets within a bivariate autoregressive jump intensity-GARCH framework (BARJI-GARCH). We particularly examine the role of weather as a short-run demand factor and inventory as a short-run supply factor in explaining price spikes and time-varying volatility in spot and futures returns. Using daily time series data from 1994 to 2004, we obtain several interesting empirical results: (1) conditional jump intensity is persistent and the likelihood of common jumps in the future depends on the past history of jump dynamics; (2) the magnitude of average jump size varies over time as a function of unanticipated low temperature and inventory surprise and (3) both means of jump intensity and jump size are higher in the winter months and lower in the summer months. These results are consistent with theory suggesting that price jumps (spikes) often occur in the situation where there is sudden shift in short-run demand when short-run supply is inelastic.

Keywords: Weather, Inventory, Volatility Jump Dynamics, Natural Gas Futures, Spot Markets

JEL Classification: C32, G13

Suggested Citation

Chan, Wing H. and Wang, George H. K. and Yang, Li, Weather, Inventory and Common Jump Dynamics in Natural Gas Futures and Spot Markets (October 1, 2009). Available at SSRN: https://ssrn.com/abstract=1537762 or http://dx.doi.org/10.2139/ssrn.1537762

Wing H. Chan

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada
519-884-0710, ext. 2773 (Phone)
519-888-1015 (Fax)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

George H. K. Wang

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Li Yang (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+610293855857 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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