Price Volatility in the Natural Gas Market

Abstract

This paper examines the causes and behavior of price volatility in the US natural gas market. Although natural gas prices are among the most volatile, they have received limited academic scrutiny heretofore. The study’s main findings are: (1) the natural gas market is characterized by volatility persistence, (2) predicted volatility increases more following a positive shock than an equal negative shock, (3) there are day-of-the-week and month-of-the-year patterns in this market, (4) surprises in the change in natural gas in storage cause increased volatility, (5) volatility tends to be higher during and immediately after bid week, and (6) volatility tends to be higher on winter days when the temperature is lower than normal. The model developed and employed in this research is an improved procedure for testing and quantifying the hypothesized volatility determinants within a GARCH type model.