A state-preference volatility index for the natural gas market

This study develops a one-month forward-looking natural gas volatility (NGVX), based on a state-preference framework. Both in-sample and out-of-sample forecasting results indicate that NGVX subsumes all the information contained in the future realized volatility and exhibits better predictive power than conventional volatility estimators. It serves as an unbiased consensus estimate of future uncertainty in the natural gas market. The day-of-the-week results reveal that NGVX decreases significantly from Wednesday to Thursday, when the weekly storage report is released. This suggests that market participants consider the storage reports as an important source of information for the valuation of natural gas. In addition, a strong seasonality tendency has been found in the natural gas market that NGVX increases when demand for heating or cooling is high. This study also confirms that the “inverse leverage effect” is present in the natural gas market that NGVX responds more to a positive shock than an equal negative shock.