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Electricity and Natural Gas Prices Sharing the Long-term Trend: Some Evidence from the Spanish Market

Author

Listed:
  • Dolores Furio

    (Department of Financial Economics, University of Valencia, Av. Los Naranjos, s/n 46022, Valencia, Spain,)

  • Javier Poblacion

    (D.G. Supervisi n, Bank of Spain, C/Alcal 48, 28014, Madrid, Spain)

Abstract

The relationship between electricity prices and fuel costs has been extensively studied. Many studies have analyzed the relationship between electricity and natural gas prices and found that electricity and natural gas futures prices are cointegrated. In this paper, using different factor models to jointly estimate the dynamics of both commodities, we show that natural gas and electricity prices are not only cointegrated but also share common long-term dynamics. This finding has crucial implications in terms of managing and hedging the risk faced by utilities, because the common long-term trend finding implies that the spark spread risk reflects only short-term effects. Moreover, these results indicate that by using prices from both commodities, it is possible to extract more information for estimation purposes.

Suggested Citation

  • Dolores Furio & Javier Poblacion, 2018. "Electricity and Natural Gas Prices Sharing the Long-term Trend: Some Evidence from the Spanish Market," International Journal of Energy Economics and Policy, Econjournals, vol. 8(5), pages 173-180.
    • Handle: RePEc:eco:journ2:2018-05-22
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    References listed on IDEAS

    as
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    Cited by:

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    More about this item

    Keywords

    Stochastic Calculus; Natural Gas; Electricity;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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