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The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis

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  • Nick, Sebastian

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

  • Tischler, Benjamin

    (Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI))

Abstract

The US and UK markets for natural gas are connected by arbitrage activity in the form of shifting trade volumes of liquefied natural gas (LNG). We empirically investigate the degree of integration between the US and the UK gas markets by using a threshold cointegration approach that is in accordance with the law of one price and explicitly accounts for transaction costs. Our empirical results reveal a high degree of market integration for the period 2000-2008. Although US and UK gas prices seemed to have decoupled between 2009 and 2012, we still find a certain degree of integration pointing towards significant regional price arbitrage. However, high threshold estimates in the latter period indicate impediments to arbitrage that are by far surpassing the LNG transport costs difference between the US and UK gas market.

Suggested Citation

  • Nick, Sebastian & Tischler, Benjamin, 2014. "The Law of one Price in Global Natural Gas Markets - A Threshold Cointegration Analysis," EWI Working Papers 2014-16, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI).
    • Handle: RePEc:ris:ewikln:2014_016
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    References listed on IDEAS

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    Cited by:

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    2. Chiappini, Raphaël & Jégourel, Yves & Raymond, Paul, 2019. "Towards a worldwide integrated market? New evidence on the dynamics of U.S., European and Asian natural gas prices," Energy Economics, Elsevier, vol. 81(C), pages 545-565.
    3. Yaya, OlaOluwa Simon & Gil-Alana, Luis Alberiko & Carcel, Hector, 2015. "Testing fractional persistence and non-linearities in the natural gas market: An application of non-linear deterministic terms based on Chebyshev polynomials in time," Energy Economics, Elsevier, vol. 52(PA), pages 240-245.
    4. Ujjwal Kanti Paul & Gurudas Das & Avijit Debnath & Tanuj Mathur, 2016. "Market Integration and Price Leadership in India’s Onion Market," Review of Market Integration, India Development Foundation, vol. 8(1-2), pages 49-64, April.

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    More about this item

    Keywords

    natural gas market; liquified natural gas; law of one price; arbitrage; nonlinear models; threshold error correction;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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