Understanding the US Natural Gas Market: A Markov Switching VAR Approach

34 Pages Posted: 17 Apr 2018

See all articles by Chenghan Hou

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies

Bao Nguyen

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU

Date Written: April 3, 2018

Abstract

Over the past three decades, the US natural gas market has witnessed significant changes. Utilizing a standard Bayesian model comparison method, this paper formally determines four regimes existing in the market. It then employs a Markov switching vector autoregressive model to investigate the regime-dependent responses of the market to its fundamental shocks. The results reveal that the US natural gas market tends to be much more sensitive to shocks occurring in regimes existing after the Decontrol Act 1989 than the other regimes. The paper also finds that shocks to the natural gas demand and price have negligible effects on natural gas production while the price of natural gas is mainly driven by specific demand shocks. Augmenting the model by incorporating the price of crude oil, the results show that the impacts of oil price shocks on natural gas prices are relatively small and regime-dependent.

Keywords: Natural gas market, Bayesian model comparison, Markov Switching VAR model

JEL Classification: C32, E32, Q4

Suggested Citation

Hou, Chenghan and Nguyen, Bao, Understanding the US Natural Gas Market: A Markov Switching VAR Approach (April 3, 2018). CAMA Working Paper No. 14/2018, Available at SSRN: https://ssrn.com/abstract=3156000 or http://dx.doi.org/10.2139/ssrn.3156000

Chenghan Hou

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

Bao Nguyen (Contact Author)

School of Economics, University of Economics Ho Chi Minh City (UEH), Vietnam; Development Policy Centre, Crawford School of Public Policy, ANU; Centre for Applied Macroeconomic Analysis, ANU ( email )

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