Convergence to the long-run equilibrium: the case of natural gas markets

Intuitively, the persistence of a shock may last longer in futures contracts with a longer maturity. Estimation of the speed with which different contract lengths converges to the long-run equilibrium following a shock, provides a means for comparing the informational efficiency of the contracts. Standard empirical investigation of the response of a market to a shock utilizes impulse response analysis. However, this analysis is problematic since there is not a unique variance-covariance decomposition. Pesaran and Shift [Pesaran, M.H., Shin, Y., 1996. Cointegration and speed of convergence to equilibrium. J. Econ. 71, 117-143] introduced an alternative to the standard impulse response analysis, the persistence profile. By estimating the one step ahead forecast error for the entire system, the persistence profile provides a unique measure of the effect of the shock. This paper empirically estimates persistence profiles for the natural gas futures market. The findings indicate that the persistence of a shock does increase with the contract length. (C) 1999 Elsevier Science B.V. All rights reserved. JEL classifications: Q40; C22; G13.