Episodic nonlinearity and nonstationarity in Alberta's power and natural gas markets

This paper uses a new method of testing for linear and nonlinear lead/lag relationships between time series, introduced by Brooks and Hinich [Brooks, C. and Hinich, M. J. Cross-Correlations and Cross-Bicorrelations in Sterling Exchange Rates. Journal of Empirical Finance 20 (1999), 385-404.], on Alberta's natural gas and power markets. The test, based on the concepts of cross-correlation and cross-bicorrelation, is used after pre-whitening of the data to test for the existence of residual nonlinearity as well as the episodic nature of the nonlinearity. Our evidence points to a relatively rare episodic nonlinearity within and across the two series, having important implications for forecasting these series.