Optimizing risk management in the Iberian natural gas market: strategies for price volatility

Purpose - The objective of this study is to assess the efficacy of cross-hedging strategies in the Iberian natural gas market by leveraging international benchmarks. These strategies aim to mitigate local price volatility amid significant market disruptions, including geopolitical events and fluctuating demand and supply dynamics. Design/methodology/approach - This study uses futures prices from the Dutch Title Transfer Facility (TTF) and the UK National Balancing Point (NBP) as proxies for cross-hedging strategies in the Iberian natural gas market. The hedging ratios are estimated using minimum variance, a specification proposed by Ederington and Salas (2008), and the BEKK model. Furthermore, a cross-hedging model is used to evaluate combinations of incumbent and alternative futures contracts. Findings - TTF and NBP are effective in mitigating price volatility in the Iberian natural gas market. TTF is identified as the more robust option due to its high liquidity and integration within European markets. Both TTF and NBP demonstrate a strong influence on local spot prices, with Granger causality results. Originality/value - To the best of the authors’ knowledge, this study presents the first empirical evidence on the effectiveness of using TTF and NBP futures contracts as hedging tools in the Iberian natural gas market, a region characterized by lower liquidity and unique regional challenges. It addresses a gap in the existing literature by focusing on cross-hedging strategies in less mature European markets.