Understanding the US natural gas market: A Markov switching VAR approach

Over the past three decades, the US natural gas market has witnessed significant changes. Utilizing astandard Bayesian model comparison method, this paper formally determines four regimes existing inthe market. It then employs a Markov switching vector autoregressive model to investigate the regimedependent responses of the market to its fundamental shocks. The results reveal that the US natural gasmarket tends to be much more sensitive to shocks occurring in regimes existing after the Decontrol Act 1989than the other regimes. The paper also finds that shocks to the natural gas demand and price have negligibleeffects on natural gas production while the price of natural gas is mainly driven by specific demand shocks.Augmenting the model by incorporating the price of crude oil, the results show that the impacts of oil priceshocks on natural gas prices are relatively small and regime-dependent