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The Informational Efficiency of European Natural Gas Hubs: Price Formation and Intertemporal Arbitrage

In this study, the informational efficiency of the European natural gas market is analyzed by empirically investigating price formation and arbitrage efficiency between spot and futures markets. Econometric approaches accounting for nonlinearities induced by the low liquidity-framework and by technical constraints of the considered gas hubs are specified. The empirical results reveal that price discovery generally takes place on the futures market. Thus, the futures market seems to be more informationally efficient than the spot market. The theory of storage seems to hold at all hubs in the long run. There is empirical evidence of significant market frictions hampering intertemporal arbitrage. UK's NBP and Austria's CEGH seem to be the hubs at which arbitrage opportunities are exhausted most efficiently, although there is convergence in the degree of intertemporal arbitrage efficiency over time at the hubs investigated.

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Energy Specializations: Energy Investment and Finance – Corporate Strategy; Natural Gas – Markets and Prices; Natural Gas – Policy and Regulation; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Natural Gas – Local Distribution; Energy Investment and Finance – Trading Strategies and Financial Instruments; Natural Gas – Other

JEL Codes:
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
L95 - Gas Utilities; Pipelines; Water Utilities
G13 - Contingent Pricing; Futures Pricing; option pricing
Q49 - Energy: Other

Keywords: Natural gas market, Informational efficiency, Nonlinear causality, Threshold error correction, Kalman filter

DOI: 10.5547/01956574.37.2.snic

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Published in Volume 37, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.