Asymmetric impacts of fundamentals on the natural gas futures volatility: An augmented GARCH approach

Abstract

We investigated the determinants of daily volatility for natural gas nearby-month futures traded on the NYMEX within a GARCH framework augmented with market fundamentals. Consistent with the previous literature, we found that volatility is much higher on the natural gas and crude oil storage report announcement days, on Mondays and during winters. We also confirmed that high volatility is associated with divergence of storage levels and temperatures from seasonal norms. The asymmetric impact of storage levels on volatility across different seasons is empirically investigated and documented. The mainstream finding in the literature that lower storage levels result in higher volatility is valid only during winter. At other times, it is actually higher storage levels causing higher volatility. Also, time to maturity effect is present only in winters. Additionally, weather shocks have asymmetric impact on volatility depending on the sign of the shock. Finally, we found that augmentation with market fundamentals improves the out-of-sample forecast accuracy of standard GARCH models.