Convergence of European spot market prices for natural gas? A real-time analysis of market integration using the Kalman Filter

This letter provides a textbook example of an econometric analysis of the integration between two commodity markets and the subsequent price convergence or absence thereof. Price relations between spot markets are analysed for natural gas in Europe. The European market for natural gas is currently undergoing a liberalization process with the aim of creating a single, unified market. Time-varying coefficient estimation models are used, applying the Kalman filter to test whether price convergence between different locations is really taking place. The results reveal that the construction of a pipeline between the UK and Zeebrugge (Belgium) has led to almost perfect price convergence between these locations in the time period under consideration; on the other hand, liberalization on the European continent does not seem to be working so far.