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Analysis of risk premium in UK natural gas futures

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  • Martínez, Beatriz
  • Torró, Hipòlit

Abstract

In many futures markets, trading is concentrated on the front contract and positions are rolled-over until the strategy horizon is attained. In this paper, a pair-wise comparison between the conventional risk premium and the accrued risk premium in rolled-over positions on the front contract is carried out for UK natural gas futures. Several novel results are obtained. Firstly, and most importantly, the accrued risk premium in rollover strategies is significatively larger than conventional risk premiums and increases with the time to delivery. Specifically, for strategy horizons between three and six months, this difference increases from 1% to 10% (or from 4% to 20% in annualized returns). Secondly, it is the first time that risk premium in day-ahead forwards has been measured in this market. The average value of the day-ahead risk premium is 0.5% per day and it is statistically significant. Thirdly, all risk premiums are significantly larger and more volatile in winter. Finally, risk premium time-variation is analysed using a regression model. It is shown that reservoir shocks, demand shocks and spot price volatility are significant explicative variables and its sign reflects equilibrium models implications for storable commodities.

Suggested Citation

  • Martínez, Beatriz & Torró, Hipòlit, 2018. "Analysis of risk premium in UK natural gas futures," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 621-636.
    • Handle: RePEc:eee:reveco:v:58:y:2018:i:c:p:621-636
    DOI: 10.1016/j.iref.2018.07.004
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    More about this item

    Keywords

    Natural gas market; Futures premium; Rollover; Seasonal risk premiums;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities

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