Natural gas futures have been volatile this past January and February. Over the next month I plan to look into the nature and determinants of the volatility (cold weather and relatively low storage volumes likely accounting for the lion's share). AS a first step, I have estimated a Markov Regime-Switching AR model on March NYMEX Natural Gas (NGH4) log returns. The AR results are:
with the transition matrix:
The results indicate a high volatility and low volatility state with a 51% and 7.9% annualized volatility respectively. Weighting these unconditional state volatilities by the filtered state probability (chart below) gives an estimate of the time-varying volatility in NGH4.
The most recent estimate is a 38% annualized volatility. A chart of NGH4 is below for the same time period.