The Reaction of the Natural Gas Price to the Changes of the Crude Oil Price in Europe and Asia Regional Markets: MSVAR Approach

This paper examines the response of the natural gas price to the crude oil price in regional markets.The price of natural gas varies in regional markets, mostly follow the crude oil price. Natural gas and crude oil are substitute in consumption and also complement in production. Economic variables such as the crude oil and natural gas prices have inflammations and severe fluctuations over time that conventional linear regressions do not fit these fluctuations. The regime Switching Model provides a flexible and dynamic framework for nonlinear models and sudden reciprocal transfers. In this paper, by using the Markov switching model framework, the impact of the crude oil price on natural gas price has been measured during the period of the January 1992 to June 2017. The results show that in some regimes the price of crude oil has a direct effect on the price of natural gas and in some other ones has a reversible effect. In Europe, the first lag of crude oil price has a reverse effect for 1 month, and 18 months of direct effect, and the second lag of oil price in both regimes has a direct effect on the natural gas price. However for Asia in both regimes, the impact of oil price on natural gas price is straight and the prices are in the first regime for 28 months and 26 months under the second regime.