The Price Forming Process in Energy Markets

Abstract

In this chapter we examine the price formation process in European energy markets during the period 2005–2009. In order to assess the development of these markets, we identify potential theoretical relations related in the price formation process, using a set of factors including energy prices and European Union allowance prices as well as controlling for important influences such as economic growth. In terms of our methodology, we adopt both static and recursive versions of the Johansen (J Econ Dyn Control 12:231–254, 1988) multivariate cointegration likelihood ratio test, as well as a variation on this test in order to control for time varying volatility effects, to estimate these potential theoretical relations. The findings are indicative of a new pricing regime emerging since January 2008 which empirically interlinks the coal, gas and oil markets with European Union allowance futures contracts. It would appear that European Union allowance contract prices play an integral role in the price formation process in European energy markets.