Modelling and Forecasting Natural Gas Prices

Financial Econometrics

Modeling and Forecasting Natural Gas Prices

Abstract
In this project we will model and forecast the natural gas prices over the short-term through the development of the Error Correction Model (ECM). This is presented as the best predictive model among various alternatives. To build this model, we gathered the oil prices to analyze the impact of the changes in these prices on the changes in natural gas prices. The results of the forecasting exercise, carried out using the US Natural Gas 3 Months Strips series, suggest that the forecasting approach can be used to obtain a performance measure for the price.
Key words: ARMA; ECM; Cointegration; Forecasting; Natural Gas Prices; Oil Prices.
JEL Classification: G17

Index
1- Introduction – The Natural Gas ............................................................................................................... 3
2- Theoretical Framework ............................................................................................................................ 4
3- Empirical Model ....................................................................................................................................... 5
3.1- Methodology – the data .......................................................................................................... 5
3.2- The Model ................................................................................................................................ 6
3.2.1- Testing for non-stationarity..................................................................................... 6
3.2.2- Modeling ................................................................................................................ 12
3.2.3- Introduction of the Erros Correction Model (ECM) ............................................. 13
3.2.4- Selection of the Lags

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