Stochastic models of natural gas prices

Leyla Ranjbari

Research output: Contribution to journalArticlepeer-review


The paper is a survey on some recent literature in natural gas spot modelling without plunging into calibration, spot-futures and spot-forward dynamics. This work, based on the fact that the crucial property of spot price in energy markets, as a commodity market, is mean-reverting. We observe that the natural gas spot
modelling can be divided into essential categories, i.e. mean-reversion models and regime-switching models. We then examine their historical extensions in the form of new techniques. In the former models, one-factor, two-factor and
three-factor spot mean-reverting models as well as their extensions are resulted
from splitting the long-run mean into two stochastic and deterministic components. We also consider the Levy diffusion based on alpha-stable process
and normal inverse Gaussian process as well as affine structure for seasonality term. As the latter category, one-factor regime-switching model is considered, which consists of two regimes either mean-reverting process or geometric Brownian motion with positive/negative drift.
Original languageEnglish
JournalJurnal Teknologi
Publication statusPublished - 15 Oct 2011


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