Identifying price bubbles in the US, European and Asian natural gas market: Evidence from a GSADF test approach

Abstract

Globally, natural gas prices vary from one region to another, which is a key factor worth considering in formulating energy-related policies or in entering the energy market for a well-considering portfolio to minimize the market risk. This study aims to detect the beginning and the culmination of possible speculative bubbles and analyzed the causes in natural gas prices of three key regional markets, namely, the European Union (EU), Asia, and the United States (US). The monthly data from January 1996 to June 2017 are analyzed by a new bubble detection method called the generalized sup ADF (GSADF) test. There are four significant findings. Firstly, two episodes of bubbles have occurred in the EU, six in Asia, and five in the US during the study period. Secondly, in 2008, the bubbles have struck all the three markets simultaneously, as the prices fluctuated rapidly and drastically. Thirdly, an apparent heterogeneity emerges in terms of the occurrence and duration of bubbles in the three markets, as mentioned above. The bubbles in the EU tend to last longer. Fourthly, the qualitative analysis of the occurrence of natural gas pricing bubbles summarized the cause of the bubbles in different markets. The global economic events can create a simultaneous influence. Geopolitical factors are attributed to the long-duration bubbles in the EU market. Economic euphoria and oil price fluctuation are the main contributing factors to the bubbles in the Asian market. Price volatility and speculation activities are the main factors leading to the price bubble in the US natural gas market. This paper contributes empirically to detect and depict the bubble periods for three natural gas market prices and investigates the cross-market different features and causes for bubbles. This research implies the financialization should be considered as the promotion of a hub-based pricing mechanism, the segmentation among different natural gas market in geography and pricing mechanism should be eliminated. This paper suggests policymakers and investors defend the possible bubbles by establishing an efficient market, diversification of natural gas supply, and unifying the global pricing mechanism. • Detection of bubbles in natural gas prices in the EU, US and Asia; • Heterogeneity regarding the occurrence and duration of bubbles in the three markets; • Bubbles struck all the three markets simultaneously in 2008; • Less frequent and longer durations of bubbles in the EU; • Natural gas prices in Asia determined by the booming market demand.