A cointegration rank test of market linkages with an application to the U.S. natural gas industry

Abstract

This research applies recently developed cointegration techniques to the measurement of market linkages when the data are nonstationary. Likelihood based tests for cointegration are applied to data from natural gas spot markets. The results indicate that natural gas spot markets at dispersed locations in the pipeline network are strongly connected. Most of the market pairs examined in the gas pipeline network satisfy a more stringent condition for perfect market integration.

Downstream integration of natural gas prices across U.S. states: Evidence from deregulation regime shifts

“…However, Walls (1994) shows that city gate markets which adopted open access at the local level were more integrated with field markets. Walls (1994) examines the degree of market integration for 20 U.S. natural gas spot markets using daily data during the period 1989 to 1990. The results indicate that all of the market pairs were cointegrated, but not all markets exhibit perfect market integration.…”

“…By 1991, 66% of the markets were cointegrated, 1 Integration of international natural gas markets has also been examined in studies by suggesting that open access made natural gas markets more competitive. Walls (1994) investigates the long-run relationship between field and city gate markets using daily data from July 1990 to June 1991 to find that field markets are integrated while the degree of integration between field and city gate markets were much less so. However, Walls (1994) shows that city gate markets which adopted open access at the local level were more integrated with field markets.…”

“…Walls (1994) investigates the long-run relationship between field and city gate markets using daily data from July 1990 to June 1991 to find that field markets are integrated while the degree of integration between field and city gate markets were much less so. However, Walls (1994) shows that city gate markets which adopted open access at the local level were more integrated with field markets. Walls (1994) examines the degree of market integration for 20 U.S. natural gas spot markets using daily data during the period 1989 to 1990.…”

“…Natural gas spot markets emerged where local distribution companies and large end users would purchase natural gas directly from producers or gas marketers at market prices as a result of the ability for natural gas pipelines to operate as open access transporters. This open access interstate pipeline transportation made possible a connected interstate pipeline grid, which in turn improved the integration of geographically disparate natural gas field markets (DeVany and Walls, 1994). In 1992, FERC Order 636 required all interstate natural gas pipeline companies to provide open access transportation and storage.…”

Pipeline Access and Market Integration in the Natural Gas Industry: Evidence from Cointegration Tests

“…If the two nonstationary price series are of the same order and cointegrated, the residual from the cointegrating regression will be stationary, t2 I I./ohansen (1988, 199 I) and lohanset~ and luselius (1996) demonstrate a maximum likelihood based method used to make inference on the parameters of the cointegratirlg vector. Walls (1993) applied the likelihood based method to data from the natural gas industry and obtained results that are qualitatively similar to those obtained using the Engle-Granger cointegration tests.…”