Effects of adverse geopolitical risk on price bubbles contagion from European natural gas prices to international energy prices

Purpose - The recent Russia–Ukraine conflict highlights the geopolitical importance of natural gas, especially in Europe. In this light, this study examines the impact of the Russia–Ukraine conflict on the spread of price bubbles from European natural gas to international energy prices. Design/methodology/approach - The Generalized Supremum Augmented Dickey-Fuller (GSADF) test is employed to detect the occurrence of price bubble episodes while the Dynamic Logit Model is used to examine price bubble contagion between the two markets. Further, a tri-variate VAR model is used to examine the determinants of the price bubble. Findings - The findings reveal multiple bubble episodes in both European natural gas and international energy prices. Further, evidence of bilateral contagion between European natural gas and the international energy market is found. In addition, the Russia–Ukraine conflict triggers price bubble episodes in both markets. Finally, a counterfactual analysis suggests that the conflict increases the bubble contagion from the European natural gas market to the international energy market by about 40%. These findings imply that the Russia–Ukraine conflict is a significant driver of high upside risks to bubble occurrence and subsequent contagion to both European natural gas and international energy prices. Originality/value - To the best of our knowledge, this study contributes new empirical evidence that the Russian–Ukrainian conflict significantly impacts the spread of price bubbles from the European natural gas market to international energy markets.