Price dynamics in gas markets

Modeling natural gas futures prices is essential for valuation purposes as well as for hedging strategies in energy risk management. We present a general multi-factor affine diffusion model which incorporates the joint stylized features of both spot and futures prices. The model is brought into state space form on which Kalman filter techniques are applied to evaluate the maximum likelihood function. We further build the basis for the construction of a daily gas price forward curve. These prices take into account the seasonal structures of spot prices and are consistent under the arbitrage-free condition with the observed market prices of standard products that provide gas delivery over longer periods. Finally the performance of the models is illustrated comparing historical and model implied price characteristics.