Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk
We examine the volatility dynamics of three major petroleum commodities traded on the NYMEX: crude oil, unleaded gasoline, and heating oil. Using the partially overlapping time-series (POTS) framework of Smith (2005), we model jointly all futures contracts with delivery dates up to a year into the f...
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| Format: | Journal Article |
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INT ASSOC ENERGY ECONOMICS
2011
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| Online Access: | http://hdl.handle.net/20.500.11937/3163 |
| _version_ | 1848744156227174400 |
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| author | Suenaga, Hiroaki Smith, A. |
| author_facet | Suenaga, Hiroaki Smith, A. |
| author_sort | Suenaga, Hiroaki |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | We examine the volatility dynamics of three major petroleum commodities traded on the NYMEX: crude oil, unleaded gasoline, and heating oil. Using the partially overlapping time-series (POTS) framework of Smith (2005), we model jointly all futures contracts with delivery dates up to a year into the future and extract information from these prices about the persistence of market shocks. The model depicts highly nonlinear volatility dynamics that are consistent with the observed seasonality in demand and storage of the three commodities. Specifically, volatility of the three commodity prices exhibits time-to-delivery effects and substantial seasonality, yet their patterns vary systematically by contract delivery month. The conditional variance and correlation across the three commodities also vary over time. High price volatility of near-delivery contracts and their low correlation with concurrently traded distant contracts imply high short-horizon price risk for an unhedged position in the calendar or crack spread. Price risk at the one-year horizon is much lower than short-horizon risk in all seasons and for all positions, but it is still substantial in magnitude for crack-spread positions. Crack-spread hedgers ignore nearby high-season price risk at their peril, but they would also be remiss to ignore the long horizon. |
| first_indexed | 2025-11-14T05:56:59Z |
| format | Journal Article |
| id | curtin-20.500.11937-3163 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T05:56:59Z |
| publishDate | 2011 |
| publisher | INT ASSOC ENERGY ECONOMICS |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-31632017-09-13T16:02:17Z Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk Suenaga, Hiroaki Smith, A. Seasonality Oil Gasoline Heating oil Volatility Crack-spread price risk We examine the volatility dynamics of three major petroleum commodities traded on the NYMEX: crude oil, unleaded gasoline, and heating oil. Using the partially overlapping time-series (POTS) framework of Smith (2005), we model jointly all futures contracts with delivery dates up to a year into the future and extract information from these prices about the persistence of market shocks. The model depicts highly nonlinear volatility dynamics that are consistent with the observed seasonality in demand and storage of the three commodities. Specifically, volatility of the three commodity prices exhibits time-to-delivery effects and substantial seasonality, yet their patterns vary systematically by contract delivery month. The conditional variance and correlation across the three commodities also vary over time. High price volatility of near-delivery contracts and their low correlation with concurrently traded distant contracts imply high short-horizon price risk for an unhedged position in the calendar or crack spread. Price risk at the one-year horizon is much lower than short-horizon risk in all seasons and for all positions, but it is still substantial in magnitude for crack-spread positions. Crack-spread hedgers ignore nearby high-season price risk at their peril, but they would also be remiss to ignore the long horizon. 2011 Journal Article http://hdl.handle.net/20.500.11937/3163 10.5547/ISSN0195-6574-EJ-Vol32-No3-2 INT ASSOC ENERGY ECONOMICS restricted |
| spellingShingle | Seasonality Oil Gasoline Heating oil Volatility Crack-spread price risk Suenaga, Hiroaki Smith, A. Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title | Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title_full | Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title_fullStr | Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title_full_unstemmed | Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title_short | Volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| title_sort | volatility dynamics and seasonality in energy prices: implications for crack-spread price risk |
| topic | Seasonality Oil Gasoline Heating oil Volatility Crack-spread price risk |
| url | http://hdl.handle.net/20.500.11937/3163 |