Cutting edge: Kriging smooth energy futures curves

This paper applies the method of kriging from geostatistics to extract smooth curves from energy futures prices. How the method can interpolate market prices is demonstrated, both for contracts with fixed delivery times and for delivery over a period, along with empirical examples from the oil and gas markets

Cutting edge - Kriging smooth energy futures curves
The Nelson-Siegel curve and how to calibrate its parameters to a set of futures prices is recalled

A range of different approaches exists to extract a continuous curve of futures prices from market-observed prices. At Nymex, accessible futures prices for delivery of WTI crude oil are available every month over a time horizon up to several years. The Nelson-Siegel curve (see Nelson & Siegel (1987)) adopted from fixed-income markets is a way to derive a continuous curve of oil futures prices from such market data. It is a four-parameter family of curves, allowing for a long-term constant level

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