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Implications of a regime-switching model on natural gas storage valuation and optimal operation. (English) Zbl 1198.91204

Summary: We propose a one-factor regime-switching model for the risk adjusted natural gas spot price and study the implications of the model on the valuation and optimal operation of natural gas storage facilities. We calibrate the model parameters to both market futures and options on futures. Calibration results indicate that the regime-switching model is a better fit to market data compared to a one-factor mean-reverting model similar to those used by other authors to value gas storage. We extend a semi-Lagrangian timestepping scheme from Z. Chen and P. A. Forsyth [SIAM J. Sci. Comput. 30, No. 1, 339–368 (2007; Zbl 1159.65352)] to solve the gas storage pricing problem, essentially a stochastic control problem, and conduct a convergence analysis of the scheme. Numerical results also indicate that the regime-switching model can generate operational strategies for gas storage facilities that reflect the existence of multiple regimes in the market as well as the regime shifts due to various exogenous events.

MSC:

91G20 Derivative securities (option pricing, hedging, etc.)
93E20 Optimal stochastic control
91G60 Numerical methods (including Monte Carlo methods)

Citations:

Zbl 1159.65352
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