Are European natural gas markets connected? A time-varying spillovers analysis

Abstract

This paper examines the European natural gas market connectedness. Four main markets from the North-Western and South European regions are investigated with the Diebold-Yilmaz connectedness approach derived from the time-varying parameters VAR model with stochastic volatility. We show that the European natural gas market becomes increasingly integrated. Our results update previous findings, which pointed to the leading role of the British NBP as a source of shocks to natural gas price and volatility. Instead, we demonstrate that the two leading markets in Europe are the Dutch TTF and the German NCG. In recent years, however, the observed dominance of the indicated markets weakens, while spillovers from the Italian PSV gain importance. This could indicate the growing role of the supply of liquefied natural gas (LNG) and the launch of the pipeline from the Caspian Sea to Italy.