What drives volatility in natural gas prices?

We examine the primary drivers of U.S. natural gas price volatility. To do so, we apply a structural heterogeneous autoregressive VAR (SHVAR) model, accommodating structural breaks in both the coefficient and volatility, to monthly time series data on natural gas supply, demand and price between January 1978 and July 2018. We detect several structural changes in coefficients and shock volatility in the natural gas market. Our findings indicate that the response of natural gas prices differs significantly depending on the regime and type of shock in the natural gas market. While demand shocks specific to the natural gas market are the primary drivers of natural gas price volatility, structural supply shocks also play a significant role in explaining movements in natural gas prices. Our results suggest that failure to consider structural breaks in the coefficient and volatility may result in biased estimates and distorted impulse responses of the impact of shocks on natural gas price volatility. (C) 2019 Elsevier B.V. All rights reserved.