Seasonality and Convenience Yields in Energy Markets

Oskar Haglund

Student thesis: Master thesis


This thesis studies the seasonal dynamics for three energy commodities using the framework developed in Miltersen (2003). Utilizing an extension from Lange (2011), a term structure model allowing for such dynamics is implemented using a Kalman Filter and calibrated to NYMEX futures prices for natural gas, heating oil and crude oil spanning the period 1994-2014. To capture the deterministic pattern induced by the physical features of commodities, a few changes are made compared to the set-up in Lange (2011). Primarily, the seasonal functions are modeled using a linear combination of sine and a cosine functions with seasonal frequencies rather than a single sinusoidal function. The thesis begins by evaluating the pricing performance of the model, nding that it performs well in a comparison to similar commodity pricing models. When the analytical focus in the subsequent section is shifted to the dynamics of the two seasonal components pointed out in Lange (2011), it is analogously shown that the initial cost of carry structure seems to drive the seasonal pattern in the spot cost of carry. For the commodities displaying seasonality, the cost of carry display signi cant drops during periods when the relative scarcity of the commodity is elevating. The seasonal volatility patterns are on the contrary estimated with low precision and are highly unstable across time. Acknowledging the hidden character of the cost of carry, the second part of the thesis uses a linear regression framework to test for determinants of the convenience yield (transformed from the ltered cost of carry). The analysis indicate that changes in inventory levels, sum of heating and cooling degrees and hedging pressure are all important drivers of the convenience yield for seasonal commodities. Moreover, for commodities with large movements in the explanatory variables, the relationship seems to weaken when the maturity of the dependent variable is increased. Finally, the robustness of the results over a pre- nancialization and post- nancialization period is investigated. While there are some indications for a ` nancialization-e ect", an assessment is made that the subject needs further investigation.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages97