Price bubbles in oil & gas markets and their transfer

Research objective of the study is to examine if price bubbles can be transferred between the oil-gas markets. We also estimate the probability of bubble transfer and see if bubble transfer probability depends on the gas pricing mechanisms, for example, oil-indexation. We examine the bubble transfer as followings; i) identifying price bubbles in WTI, Brent, Henry Hub, EU gas, and Japan gas markets using Generalized Sup Augmented Dickey-Fuller (GSADF) test, ii) applying Granger causality test and Autoregressive Distributed Lag (ARDL) model to GSADF test statistics, not the energy prices, which is an innovative approach to understand price bubbles transfer, and iii) estimating probabilities of bubble transfers from the oil market to gas market using Logit models. Empirical results show that GSADF statistics for oil prices Granger cause GSADF statistics for gas prices implying that price bubbles in the oil market could transfer to the gas market. ARDL models with GSADF statistics indicate that the impact of oil GSADF on gas GSADF depends on gas pricing mechanisms. Japan gas market has the large impact and chance of transferring price bubbles from Brent while Henry Hub has the small impact and low chance of bubble transfer from WTI. This study contributes to existing literature by confirming that price bubbles in the oil market transferred to the gas market and the probabilities of transfer depend on gas pricing mechanism. •Previous studies have shown price bubbles had occurred in oil and gas markets partly due to energy market financialization.•We find evidence that price bubbles in the oil market transferred to the gas market and not vice versa.•The main driver of bubble transfer from the oil market to gas market is gas pricing mechanism.•Gas market in the U.S. where hub pricing prevails has a lower chance of bubble transfer from WTI to Henry Hub.•Gas market in Japan where oil indexation dominates has a large probability of bubble transfer from Brent to Japan gas market.