LNG freight rate and LNG price, carbon price, geopolitical risk: A dynamic connectedness analysis

Abstract

With the change in energy structure, the world's demand for natural gas is increasing, and the LNG shipping market is also gradually expanding. This paper studies the time-varying connectedness between LNG freight rates and natural gas prices, geopolitical risk, and carbon prices in time and frequency domain with TVP-VAR-DY spillover index and TVP-VAR-BK spillover index respectively. Both global market and regional markets are considered in this research. This research draws the following conclusions: firstly, in this system, the short-term connectedness is the largest, followed by the long-term connectedness. Secondly, multi-month freight rate is crucial in the system. Thirdly, the net spillover effect from geopolitical risk to freight rate only appears in the short term and it's very small. Just considering the one-way connectedness, the importer's geopolitical risk transmits most short-term shocks and the exporter's geopolitical risk transmits most medium-term shocks. Finally, after the carbon price rose in the fourth stage of EU ETS, it became the transmitter of shocks to LNG freight rates in the global market and Australia-Japan market. It also received less shocks from LNG freight rates in the U.S.-Europe market. Based on these findings, we provide guidance for interested agents in the end.