Dynamics of the Forward Curve and Volatility of Energy Futures Prices

34 Pages Posted: 27 Oct 2010

See all articles by Amir H. Alizadeh

Amir H. Alizadeh

City University London - The Business School

Wayne K. Talley

Old Dominion University - Economics

Date Written: August 7, 2009

Abstract

The shapes of forward curves of energy commodities are believed to contain information on the volatility of futures prices for these commodities. The slope of the forward curve not only reflects temporal supply and demand conditions, but also the relationship between current and expected market conditions. However, no empirical investigation exists in the literature on whether utilising information on the slopes of the forward curves of energy commodities can improve one’s ability to capture the dynamics of the volatility of the futures prices of these commodities. The aim of this study is to undertake such an investigation. Daily energy futures prices traded on the New York Mercantile Exchange (NYMEX) over the period January 1997 to December 2006 are used to estimate the parameters of an augmented transition EGARCH model that allows for changes in the model’s parameters based on the forward curve. The forecasting performance of the model is compared to that of other models in predicting the volatility of energy futures prices over the period January 2007 to December 2008. The results provide strong support in favour of a convex relationship between the volatility of energy futures prices and the forward curve.

Keywords: Energy Futures, Volatility, Forward Curve, Forecasting, VaR

JEL Classification: , C12, C53, G13, G32, Q41, Q47

Suggested Citation

Alizadeh, Amir H. and Talley, Wayne K., Dynamics of the Forward Curve and Volatility of Energy Futures Prices (August 7, 2009). Available at SSRN: https://ssrn.com/abstract=1698159 or http://dx.doi.org/10.2139/ssrn.1698159

Amir H. Alizadeh (Contact Author)

City University London - The Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Wayne K. Talley

Old Dominion University - Economics ( email )

Norfolk, VA 23529
United States

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