Abstract
AbstractThis chapter presents various statistics for the Henry Hub natural gas and PJM electricity price series in the spot and futures markets. The results indicate support for the unit root hypothesis of each series. Therefore, we cannot expect to profit by forecasting these prices. However, the cointegration hypotheses between the spot and futures prices of these series are accepted. This chapter proposes two trading strategies that utilize the long-term equilibrium relationship between gas and electricity prices. The simulation with these historical data shows that even if a power generation company owns equipment inferior to that in the market, it can potentially profit via arbitrage between the spot and futures price difference between power and gas and the statistical arbitrage between the gas and power futures prices. Moreover, we estimate five types of copulas to express the joint distribution of the futures price returns. The simulation with random numbers after creating the copulas measures the risk of a portfolio consisting of gas futures short positions and power futures long positions held during statistical arbitrage.KeywordsElectricityNatural gasArbitrageCopulaRisk measurement
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