On the link between forward energy prices: A nonlinear panel cointegration approach

This paper investigates the relationship between forward prices of oil, gas, coal, and electricity using a nonlinear panel cointegration framework. To this end, we consider a panel of 35 maturities and control for the economic and financial environment using equity futures prices. Estimating the cointegrating relationship, we find that oil, gas and coal forward prices are positively linked, while the negative link between oil and electricity prices is consistent with a substitution effect between the two energy sources on the long run. Estimating panel smooth transition regression (PSTR) models, we show that the forward oil price adjustment process toward its equilibrium value is nonlinear and asymmetric, putting forward the key role played by self-sustaining dynamics and speculation phenomena.

► The relationship between forward energy prices is investigated. ► We rely on a nonlinear panel cointegration framework. ► We find a substitution effect between oil and electricity on the long run. ► The adjustment process of the forward oil price to its equilibrium value is nonlinear.