Portfolio Risk Analysis Of The Natural Gas Market Based On Copula Method

According to the prediction from the International Energy Agency (IEA), theconsumption of natural gas for the whole world would increase with a rate of1.5%peryear from2007to2030, and reaches41600×108m3in2030. In the middle east and thecommonwealth of independent states, the natural gas consumption already accounts formore than50%of the primary energy source and shows a tendency of gradual increase inthe near future. One can easily realize from the history of the development of the primarynatural gas market, that the pricing mechanism of the natural gas has gone through anevolution from the monopoly pricing to competitive market pricing, along with theprogress in the natural gas industry and the drastic increase of the consumption of naturalgas. Considering the rapid development of the natural gas market, our current pricingmechanism is already out of date, and a revolution is demanding. It is rather necessary toestablish a reasonable structure of the natural gas market and the corresponding pricingsystem, in order to ensure the health development of our natural gas industry. Once thenatural gas market starts running, then several markets such as spot and futures marketswould appear. Hence, to reduce the financial risk, the natural gas companies might takethe combination of several markets into consideration. However, most of the domesticresearch focuses on the price of natural gas, but seldom pay attention to the quantificationof the financial risk of the natural gas market. Therefore, we have employed the Copulajoint distribution function to quantify the risk of the investment combination. Thisapproach perfectly takes into account the nonlinear feature of the natural gas price andalso the risk aversion of the investors, which thus gives a better estimation.In this work, we first introduce the trend of the development of the natural gasmarket, the financial feature of the natural gas and the corresponding risk estimationmethods. Afterwards, we apply the theory of the investment combination to the naturalgas market, and systematically analyze the purchase combination of multi-markets for thenatural gas companies. Based on the correlation between the natural gas properties, theCopula function is employed to investigate such nonlinear correlations. Finally, theconstructed model is directly applied to a current natural gas market.Our current pricing system for the natural gas is still characterized by “cost plus”,which actually cannot reflect the real affordability of the customers. It is general trend toreference the advanced pricing mechanism in abroad. Regarding the purchase combination issue for the natural gas companies in a multi-market scenario, analyses ofthe expected profit and risk are performed. Most of the reported work adopts methodssuch as the VaR and CVaR to estimate the risk, which rarely takes into account the riskaversion degree of the customers. In this work, we employ the spectral risk functions tomodel the best combination for the customers. In comparison to the VaR and ES methods,the customers can freely choose the risk function according to their own aversion degree,which is therefore more flexible.Presently, research on the joint distribution issues of the yield rate series of the spotand futures natural gas markets is rarely reported. Our investigation reveals that the yiledrate series of the natural gas show pronounced thick tail and heteroscedasticity. Thenatural gas properties exhibit remarkable nonlinear correlations and linear correlationcoefficients thus cannot fully reflect the correlation structures. In this work, we combinethe Copula function and the GARCH model to avoid the weakness of the conventionalapproaches. Our results demonstrate that the Copula function can better estimate the riskthan the binary normal distribution model.