Price dynamics of the natural gas futures market: the role of market fundamentals

In this thesis, I examine the effect of market fundamentals upon the price of the natural gas futures contract. The market fundamentals that I address capture the effects of the demand for natural gas, such as weather effects, and the supply of natural gas, such as inventory effects. I also address the effect of key macroeconomic variables, such as the returns on the stock market, which is measured by the return on the S&P 500 futures contract, and the price of crude oil, which is measured by the returns on the crude oil futures contract. I focus my analysis on the conditional mean and the conditional variance of the return on the natural gas futures contract. My results indicate that weather and inventory shocks do not have a significant effect upon the conditional mean of the natural gas futures returns, which is, however, significantly negatively related to the return on the S&P 500 futures contract and significantly positively related to the return on the crude oil futures contract. The conditional variance of the natural gas futures return is significantly higher in winter, on inventory announcement days and on Mondays. Furthermore, by comparing the conditional variance of the three most liquid futures contracts, I find evidence supporting the “Samuelson effect” that the futures volatility decreases as the contract horizon increases