Modeling Natural Gas Price Volatility: The Case of the UK Gas Market

We investigate if and how gas price volatility can be explained on the basis of market fundamentals. We depart from the Kanamura (2009) supply and demand based volatility model. We generalize this model to account for a variety of demand and supply relationships. We investigate daily natural gas prices in the UK in the 21st century. We find that different supply curves exist in particular sub periods and we establish the presence of various leverage effects. We conclude that supply and demand based volatility models relying on different supply assumptions provide a sound theoretical and economic foundation for using GARCH models in the UK gas market.

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