van Wijnbergen, S.

Zhao, L.

English

We investigate the relationship between the gas spot market and the price of gas storage capacity.Contrary to the common belief, the auction prices for gas storage are mostly affected by the volatility ofcurrent market prices rather than by the winter-summer price differences. This paper provides a numericalsolution for pricing storage capacity, by taking investor’s activities through the spot market and storageservice into account. A bivariate Generalized Autoregressive Score (GAS) model is employed for modelingthe dynamics of the day-ahead and month-ahead spot market prices, as well as the time-varying volatilitiesand correlations. Under an incomplete market setting, our model is able to approximate the realized auctionprices. Moreover, one interesting implication is that the implied average risk aversion of investor for astorage contract increases with the volatility of the spot market. This is an intuitive result because storagecapacity can serve as an effective hedging product for the spot market, and the demand for this product ishigh when the market becomes risky: more risk averse investors are participating in the auctions. Moreover,a sensitivity analysis on different injection/withdrawal rates is also included, and particularly, contracts withhigher capacity rates are priced at a higher level

International Migration, Integration and Social Cohesion online publications

Asset Pricing in Incomplete Markets: Valuing Gas Storage Capacity

https://pure.uva.nl/ws/files/26912325/SSRN_id2653647.pdf

Asset Pricing in Incomplete Markets: Valuing Gas Storage Capacity

Abstract

Similar works

Full text

Available Versions

International Migration, Integration and Social Cohesion online publications