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An Econometric Analysis of the Market for Natural Gas Futures

This research tests a form of the efficient markets hypothesis in the, market for natural gas futures. Unlike other studies of futures markets, the test for market efficiency is conducted at numerous locations which comprise the, natural gas spot market in addition to the delivery location specified in the futures contract. Natural gas spot and futures prices are found to be nonstationary and accordingly are modeled using recently developed maximum likelihood cointegration techniques. The futures market price is found to be cointegrated with nearly all of the spot market prices across the national network of gas pipelines. The hypothesis of market efficiency can be rejected in 3 of the 13 spot markets examined.

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Energy Specializations: Energy Investment and Finance – Trading Strategies and Financial Instruments; Natural Gas – Markets and Prices

JEL Codes: Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, L95: Gas Utilities; Pipelines; Water Utilities, Q35: Hydrocarbon Resources, G13: Contingent Pricing; Futures Pricing; option pricing, G14: Information and Market Efficiency; Event Studies; Insider Trading

Keywords: Natural gas, futures markets, gas prices, market efficiency, cointegration, spot market

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No1-5

Published in Volume16, Number 1 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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