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Incorporating Seasonality and Volatility Updating in Gas Storage Valuation for the Purpose of Validation

Roelofs, N.A.J. (2015) Incorporating Seasonality and Volatility Updating in Gas Storage Valuation for the Purpose of Validation.

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Abstract:Deregulation and growing demand for gas resulted in growing investments in gas storages. In recent years valuation techniques are developed to price these storages. In response to these valuations, prices have to be audited for regulatory purpose. This study supports audit work on the valuation of gas storages. A valuation method often used is the spot approach of Boogert and De Jong (2008). The existence of seasonality and volatility clustering in gas spot prices is shown. We take seasonality into account by smoothing a forward curve with daily granularity to form a time-dependent equilibrium level. We simulate volatility updating by a GARCH model. The impact of both techniques on the distribution of values of the LSMC method is shown. Incorporating seasonality results in slightly higher values but gain is obtained by the fact that the equilibrium level is in line with market expectations. Using a GARCH model to incorporate volatility updating results in much higher values. We conclude that the two presented techniques to extend the spot approach are appropriate for the purpose of model validation. If these techniques are used for having a claim on the one and ‘true’ value, they should be handled with care.
Item Type:Essay (Master)
Clients:
EY, Amsterdam
Faculty:BMS: Behavioural, Management and Social Sciences
Subject:31 mathematics, 54 computer science, 83 economics
Programme:Industrial Engineering and Management MSc (60029)
Link to this item:http://purl.utwente.nl/essays/67601
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