Essays in the evolving European natural gas markets

In this dissertation, liquidity, price volatility and integration are investigated in European natural gas markets. Liquidity in the one-month-ahead forward market is examined using tick-by-tick data and measures from financial markets. A time-varying multivariate approach is adopted to assess correlations between trading activity, volatility and liquidity. Results support the extension of the financial market microstructure theory to physical markets and contribute towards understanding dynamics and driving forces of liquidity in energy markets. They confirm that order flow aspects asset prices and that a correlation exists between price volatility and liquidity. The main drivers of natural gas price volatility are identified using BEKK models, which are particularly suitable because they allow for volatility spillovers within markets. Asymmetries and changes in the fundamental drivers of demand, supply and inventory are considered, and expectations of the theory of storage are assessed. Results support fundamental values as main drivers of price volatility in natural gas markets and indicate greater integration between natural gas and electricity markets. Finally, the process towards the integration of European natural gas markets is investigated in the one-month-ahead and day-ahead forward markets. Cointegration procedures are adopted, which are robust to outliers, seasonalities, leptokurtosis and GARCH effects in the energy price time series. Results show that barriers to trade remain, which prevent full integration, mostly in day-ahead markets, and may impact competitiveness. Long-run relationships between crude oil and natural gas prices are also investigated and are not supported by data, thus highlighting increased reliance of hub pricing mechanisms to the fundamental drivers. In all, there are indications of greater exposure of hub prices to short-term dynamics in the natural gas and power sectors, which are affected by capacity allocation management and have implications for the overall efficiency of European energy sector