The paper examines the relationship between UK wholesale gas prices and the Brent oil price over the period 1996-2003. Tests for Unit Roots and Cointegration are carried out and it is discovered that a long run equilibrium relationship between UK gas and oil prices predates the opening of the UK-Mainland Europe Inter-connector. Following a recursive methodology (Hansen & Johansen 1999), it was found that the cointegrating relationship is present throughout the sample period. However, the long run solutions seem to be more volatile. Evidence is provided that the short run relationship is linear and impulse response functions are used to examine the effects that a shock in oil would have on gas.
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Paper provided by EconWPA in its series Econometrics with number
0504004.
Find related papers by JEL classification: C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing O13 - Economic Development, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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