Price Spillover Effects across Natural Gas, Oil and Stock Markets in Korea, China and Japan

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Korea, Japan, and China are the most important importer in Asian LNG market and they import natural gas as LNG. With the price mechanism that LNG price is linked with oil price, they have mutual relationship with other countries. Different with the crude oil market, natural gas market is still under development. In this paper, we check the cointegrated situation with 3 countries importing price with the VAR(Vector Autoregressive) model and analyze the spillover effect in the formation of LNG importing price. We investigate price spillover effect on LNG, crude oil and markets price in Asian countries by the analysis of the linear VAR model with the LNG price as an independent variable, and the international oil price, stock market index in the 3 countries as an exogenous variable. The results show that Korean and Japanese gas prices are cointegrated with WTI oil prices, but Chinese natural gas market doesn’t show the same results compared with Korea and Japan. Moreover the Chinese LNG price has the negative relationship with Shanghai stock return and the WTI and the NYSE are no relationship with the Chinese LNG price. In Korea, LNG price has the positive relationship with the one-time lag of WTI but neither KOSPI or NYSE has the effect on the Korean LNG market. Japanese LNG price has the positive relationship with the one-time lag of WTI and one-time lag of NYSE although it has little relationship with NIKKEI index. These results support the price spillover from crude oil markets to LNG market, butlocal stock markets do not support the price spillover to LNG market in Korea, China and Japan. Japanese LNG importing price spillover to the stock market of Japan. The different results of price spillover effect could be explained by the pricing mechanism of LNG. Due to regional segmentation and limited inter-continental natural gas trade, it is highly possible for each region to have different spillover effects. The results of this paper have at least two policy implications. First, since Korea and Japan have long history of importing LNG and spillover effect between two countries, they should try to diversify the importing countries and reduce the Asian premium price. Furthermore, China is still under the early phase of the importing natural gas and it need the preemptive policy to limit the natural gas price from rising through liberalization of natural gas market. The research is not free from the limitation what the results are only applied to Asian 3 countries and we will need to develop the expanded model for the generalization of the LNG price mechanism.