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Impulse responses in a threshold cointegrated system: the case of natural gas markets

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  • T. H. Root
  • D. Lien

Abstract

The response of a futures contract to an exogenous shock may partially depend upon the maturity of the contract. Investigation of the speed with which the contract returns to its long run equilibrium is dependent upon the time series specification of the contract. This paper estimates generalized impulse response functions that result from exogenous shocks to a threshold error correction model of the natural gas futures market. The estimation results of the threshold model indicate that it is an appropriate model of the natural gas futures market. Therefore the calculation of impulse responses should account for both the size of the shock and the history of the series. This is accomplished via a generalized impulse response function. Calculation of the generalized impulse response functions indicates that the length of the futures contract is an important determinant of the ability of the system to return to its long run equilibrium following a shock.

Suggested Citation

  • T. H. Root & D. Lien, 2003. "Impulse responses in a threshold cointegrated system: the case of natural gas markets," Applied Financial Economics, Taylor & Francis Journals, vol. 13(1), pages 23-35.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:1:p:23-35
    DOI: 10.1080/09603100110090226
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    References listed on IDEAS

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    1. Obstfeld, Maurice & Taylor, Alan M., 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 441-479, December.
    2. Martin Martens & Paul Kofman & Ton C. F. Vorst, 1998. "A threshold error-correction model for intraday futures and index returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 245-263.
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