Modeling Natural Gas Prices Volatility

Abstract

Researches done so far indicate that oil reserves around the word will most probably have been used up in 50 year’s time. This fact has necessitated the researches and use of new energy sources which can be alternative to oil, the most commonly used energy source around the world. Unforgettable Chernobyl nuclear disaster in 1980s, in Ukraine, caused to see the energy glass half empty; and this negative viewpoint has got more acute after the radiation leakage in Fukushima power plant which was damaged in the earthquake in Japan, in 2011. Furthermore, hydroelectric power plants have provoked reaction from many eco-warriors and organizations as they cause ecological disequilibrium through floods in natural habitat. Moreover, it will be pointless to mention coal-fired thermal power plants, which created the term “year without summer” due to the air pollution they caused during Industrial Revolution in England between 18th and 19th centuries. When the topic is energy and its production, market conditions, in which inputs enabling production are dealt in, get affected from various outside/exterior factors. Dynamics of these input markets which are based on delicate balances change constantly; and thus, these changes become influential on aforementioned input prices. Thinking markets selling oil and its derivatives, it becomes more comprehensible that dynamics are significant and related to each other. Without a doubt, one of the energy inputs which are closely dependent on these critical market conditions is natural gas prices. In this study, stability of daily natural gas prices between 1997 and 2012 will be researched and its volatility will be tried to be modeled via ARCH&GARCH model family..