Weather, Inventory and Common Jump Dynamics in Natural Gas Futures and Spot Markets

This paper studies the common jump dynamics in natural gas futures and spot markets within a bivariate autoregressive jump intensity-GARCH framework (BARJI-GARCH). We particularly examine the role of weather as a short-run demand factor and inventory as a short-run supply factor in explaining price spikes and time-varying volatility in spot and futures returns. Using daily time series data from 1994 to 2004, we obtain several interesting empirical results: (1) conditional jump intensity is persistent and the likelihood of common jumps in the future depends on the past history of jump dynamics; (2) the magnitude of average jump size varies over time as a function of unanticipated low temperature and inventory surprise and (3) both means of jump intensity and jump size are higher in the winter months and lower in the summer months. These results are consistent with theory suggesting that price jumps (spikes) often occur in the situation where there is sudden shift in short-run demand when short-run supply is inelastic