EconStor >
Friedrich-Alexander-Universität Erlangen-Nürnberg (FAU) >
Institut für Wirtschaftspolitik und Quantitative Wirtschaftsforschung (IWQW), Universität Erlangen-Nürnberg >
IWQW Discussion Paper Series, FAU Erlangen-Nürnberg >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/30184
  
Title:Pricing an European gas storage facility using a continuous-time spot price model with GARCH diffusion PDF Logo
Authors:Schlüter, Stephan
Davison, Matt
Issue Date:2010
Series/Report no.:IWQW discussion paper series 02/2010
Abstract:In this article we present both a theoretical framework and a solved example for pricing an European gas storage facility and computing the optimal strategy for its operation. As a representative price index we choose the Dutch TTF day-ahead gas price. We present statistical evidence that the volatility of this index is time-varying, so we introduce a new continuous-time model by incorporating GARCH diffusion into an Ornstein-Uhlenbeck process. Based on this price process we use dynamic programming methods to derive partial differential equations for pricing a storage facility. As an example we apply our methodology to a storage site located in Epe at the German-Dutch border. In this context we investigate the effects of multiple contract types, and perform a sensitivity analysis for all model parameters. We obtain a value surface displaying the properties of a financial straddle. Both volatility and mean reversion influence the facility value - but only around the long-run mean of the gas price. The terminal condition, which includes information about the contract provisions, is of importance if it contains e.g. penalty terms for low inventory levels. Otherwise its influence is diminishing for increasing lease periods.
Subjects:TTF gas price
GARCH diffusion
natural gas storage
dynamic computing
JEL:C31
C61
Document Type:Working Paper
Appears in Collections:IWQW Discussion Paper Series, FAU Erlangen-Nürnberg

Files in This Item:
File Description SizeFormat
621625825.pdf343.58 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/30184

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.