Integration of Physical and Futures Prices in the US Natural Gas Market
22 Pages Posted: 29 Mar 2015
Date Written: March 27, 2015
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: Suggested Citation