Integration of Physical and Futures Prices in the US Natural Gas Market

22 Pages Posted: 29 Mar 2015  

Hamed Ghoddusi

Stevens Institute of Technology - School of Business

Date Written: March 27, 2015

Abstract

This paper examines the integration between the prices of different types of physical (upstream/end-use) and futures contracts of natural gas in the US for the period of June 1990-Dec 2014. To examine the equilibrium relationship between physical and futures prices, several cointegration tests, allowing for the presence of potentially unknown structural breaks, are applied. The study finds that (a) futures prices are cointegrated with all physical market prices; (b) futures prices Granger cause commercial and residential prices; (c) seasonal adjustment makes a significant change in the outcome of impulse response (IR) and variance decomposition analysis of the system; and (d) futures contracts with a longer time-to-maturity explain a larger portion of commercial gas price variations.

Keywords: Natural Gas, Spot-Futures Cointegration, VECM, Unit Root

JEL Classification: Q40, Q43, N72

Suggested Citation

Ghoddusi, Hamed, Integration of Physical and Futures Prices in the US Natural Gas Market (March 27, 2015). Available at SSRN: https://ssrn.com/abstract=2586057 or http://dx.doi.org/10.2139/ssrn.2586057

Hamed Ghoddusi (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

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