Cutting edge: Correlation functions in the crude oil and natural gas futures markets

Given the importance of the crude oil and natural gas futures markets, the intra-market correlations in these markets play an important role in pricing, hedging and managing the risks of energy portfolios. This paper by Ehud Ronn contributes to the understanding of the cross-maturity correlations in crude oil futures contracts, as well as explicitly modelling the seasonality of prices in the natural gas market

Coefficients of correlations are used intensively throughout the energy markets. In the area of real products, they play a crucial role in the valuation of assets such as storage facilities and pipelines, and as spread options between input and output prices. On the financial side, the valuation of structured products frequently depends on one or more points on a particular futures curve – for example, calendar-spread options on different points of the crude oil curve – with concomitant