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

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  • Chenghan Hou
  • Bao H. Nguyen

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.

Suggested Citation

  • Chenghan Hou & Bao H. Nguyen, 2018. "Understanding the US Natural Gas Market: A Markov Switching VAR Approach," CAMA Working Papers 2018-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2018-14
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    File URL: https://crawford.anu.edu.au/sites/default/files/2025-01/14_2018_hou_nguyen.pdf
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    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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