Can modeling the natural gas futures market as a threshold cointegrated system improve hedging and forecasting performance? |
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Authors: | Thomas H. Root Donald Lien |
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Affiliation: | a College of Business and Public Administration, Drake University, 2507 University Avenue, Des Moines, IA 50311, USA b Department of Economics, University of Texas-San Antonio, 6900 North Loop 1604 West, San Antonio, TX 78249-0633, USA |
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Abstract: | The calculation of the hedge ratio, and therefore the effectiveness of the hedge, is dependent upon the correct specification of the relationship between the futures and spot price. Likewise, a forecast of the future spot or futures price is dependent upon the model specification. This article investigates the appropriateness of using a threshold cointegrated model of the natural gas markets as the basis for hedging and forecasting. The findings suggest that the threshold model is more appropriate for longer contract length and that the threshold model does not offer much improvement in hedging or forecasting efficiency. |
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Keywords: | Threshold Hedging Forecasting Natural gas |
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