Mathematical and Statistical Methods for Actuarial Sciences and Finance

Energy markets: crucial relationship between prices 31

electricity and gas price formation. The misalignment between oil and gas in the short
run may depend on different forces (i.e., the supply of gas from Algeria or Russia)
that may provide some independent source of randomness for natural gas prices. This
may explain why, especially in turbulent periods, gas and oil tend to have different
dynamics, while natural gas prices follow crude oil in the long run.

6 Conclusions

This paper analyses the dynamics of the prices of oil, electricity and natural gas in the
European markets in order to estimate the nature of the existing relationship among
them. The simple correlation analysis among the various time series is non-effective
given the non-stationarity of the data. A cointegration approach is chosen to measure
a possible integration among the markets.
A cointegration relationship among each pair of commodities is found using the
Engle-Granger approach. The Johansen cointegration test reports that oil, gas and
electricity prices are all cointegrated. Two further integrating equations are found,
implying that one common trend is present in the energy market. From an economic
point of view this can be interpreted as a simple source of risk (the oil market), which
affects the dynamics of the two other commodities (electricity and gas).

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