An Econometric Analysis of Correlated Discrete Event Impact on the Price of Natural Gas: The Nord Stream’s Effect on European Markets

Abstract

In this paper I provide an econometric analysis of correlated discrete event impact on the price of natural gas, namely the Nord Stream’s effect on the European natural gas market. The Nord Stream is a rare large scale event with the potential to induce significant price effects in commodity markets and reshape price dynamics. I collect data from several sources, conduct a series of data transformation techniques, idiosyncratic econometric tests and develop several univariate Arch and Garch estimation models and determine that the implementation of the Nord Stream does in fact have an impact on the price of European natural gas. My research substantiates that the Nord Stream’s effect is priced into European markets during the period between the Nord Stream receiving final approval from the Finnish government on 12th February 2010 and the opening of the 1st pipeline on 11th November 2011. Whilst accounting for the trend, during this period the price of European natural gas is 3.3071% lower. This result is reinforced by a Chow breakpoint test that implies a structural break occurs in the pricing of European natural gas on 12th February 2010. The model also significantly implies that outside of the trend ceteris paribus that a 10% increase in the price of Brent crude oil corresponds to a 1.93% decrease in the price of European natural gas and that a 10% increase in the price of North-Western European coal corresponds to a 3.01427% increase in the price of European natural gas.