INTEGRATION OF ENERGY MARKETS: the case of USA-EU interdependence

Iva Ivanova, Boryana Bogdanova


Abstract: In the vocabulary of international finance, markets are completely integrated if assets, having the same level of risk, have the same level of expected returns[1]. The current research aims to quantify the integration across markets in the energy sector. In particular we measure the degree of integration between the gas markets of the USA and the EU (represented by UK and Germany), by using commodity data on a nearest-future basis. We employ two classical approaches - rolling sample correlation and cointegration analysis, as well as a novel one - wavelet coherence, so as to uncover relationships in the frequency domain over time. Graphing the phase difference allows us to determine the market leader and the market follower. Our investigation broadly seeks to answer the question whether we can talk about a single global gas market, or the US and UK’s and Germany’s gas markets are more or less local; and whether global economic events such as the Global Financial Crisis bring them closer.

[1]  An extensive discussion is available in (Bekaert, 1995).