Volume 15 | Issue 3 | Article 4
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Trading Opportunities in the Natural Gas-Propane Futures Spread
This paper examines the statistical properties of natural gas and propane futures prices. First, it shows that each price series is integrated of the same order. Next, the study shows that the two price series are cointegrated; that is, they are reliably linked in the long run. The study then exploits the cointegrating nature of the two energy price series to demonstrate the existence of profitable trading opportunities involving the two energy markets. More specifically, the paper develops and back-tests a trading strategy based on the finding that natural gas and propane prices are cointegrated and finds that the proposed trading system yields economically significant risk-adjusted results.
