Analysis of long-term natural gas contracts with vine copulas in optimization portfolio problems
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In Europe gas is sold according to two main methods: long-term contract (LTCs) and hub pricing. Europe is moving towards a mix of long term and spot markets, but the eventual outcome is still unknown. The fall of the European gas demand combined with the increase of the US shale gas exports and the rise of Liquefied Natural Gas availability on international markets have led to a reduction of the European gas hub prices. On the other side, oil-indexed LTCs failed to promptly adjust their positions, implying significant losses for European gas mid-streamers that asked for a re-negotiation of their existing contracts and obtained new contracts linked also to hub spot prices. The debate over the necessity of the oil-indexed pricing is still on-going. The supporters of the gas-indexation state that nowadays the European gas industry is mature enough to adopt hub-based pricing system. With the aim of analyzing this situation and determining whether oil-indexation can still be convenient for the European gas market, we consider both spot gas prices traded at the hub and oil-based commodities as possible underlyings of the LTCs. We investigates the dependence risk and the optimal resource allocation of the underlying assets of a gas LTC through pair-vine copulas and portfolio optimization methods with respect to five risk measures. Our results show that European LTCs will most likely remain indexed to oil-based commodities, even though a partial dependence on spot hub prices is conceded.
KeywordsLong-term natural gas contracts Multivariate dependence structure Pair-copula construction Portfolio optimization Vine copulas
We are grateful to the Editor and the anonymous referees for valuable comments. The work of the author M.E. De Giuli has been partially supported by MIUR, Italy, PRIN MISURA 2010RHAHPL. E. Allevi and G. Oggioni are grateful to the UniBS H&W Project “Brescia 20-20-20” for the financial support.
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