How efficient are natural gas markets in practice? A wavelet-based approach

Amina-Feriel Baba, Sana Ben Kebaier and Anna Creti
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Amina-Feriel Baba: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Sana Ben Kebaier: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Anna Creti: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique, LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper is the first attempt to provide a comprehensive account of pricing and informational efficiency of the US and EU natural gas markets. We rely on Maximum Overlap Discrete Wavelet decomposition (MODWT) of daily data of US Henry Hub, British NBP and Dutch TTF natural gas physical and futures returns at different maturities between 2013 and 2019. Multiscale linear and nonlinear Granger causality and random walk testing are investigated. We find that futures prices and spot prices of Henry Hub, NBP, and TTF are cointegrated. Moreover, multiscale causality testing shows that Henry Hub markets exhibit strong bidirectional causality between spot and futures markets. EU markets are globally efficient in terms of pricing despite some inconsistencies on the causality direction across time scales and maturities of the futures contracts. Finally, for the three selected futures markets, informational efficiency is reached only in the long-run. The results make it possible to establish an evaluation of the hubs in terms of their capacity to provide reliable reference prices for the quantities of gas under contract through a discussion on the crucial role of liquidity and storage capacity.

Keywords: MODWT; Frequency domain; Natural gas; Informational efficiency; Multiscale Granger causality; Random walk testing (search for similar items in EconPapers)
Date: 2022
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Published in Annals of Operations Research, 2022

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03958311

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