Seasonality in natural gas prices : an empirical study of Henry Hub Natural Gas Futures Prices

In this thesis we investigate whether seasonality is a significant factor in natural gas futures prices. We test for seasonality by estimating the two-factor model of Schwartz & Smith (2000), using Kalman filtering techniques in Matlab1. Next, we extend the model with a trigonometric seasonality function, following Sørensen (2002), to see if the new factor is significant and leads to better estimation of other parameters in the model2. Our results indicate that Model 1 suffers from an omitted parameter bias, caused by the lack of a seasonal factor. After including seasonality in Model 2, the model improves significantly; leading us to conclude that seasonality is present in natural gas prices. This seasonality causes prices to be higher in winter months and lower in summer months