Essays on price dynamics, discovery, and dynamic threshold effects among energy spot markets in North America

Given the role electricity and natural gas sectors play in the North American economy,an understanding of how markets for these commodities interact is important. Thisdissertation independently characterizes the price dynamics of major electricity andnatural gas spot markets in North America by combining directed acyclic graphs withtime series analyses. Furthermore, the dissertation explores a generalization of pricedifference bands associated with the law of one price.Interdependencies among 11 major electricity spot markets are examined inChapter II using a vector autoregression model. Results suggest that the relationshipsbetween the markets vary by time. Western markets are separated from the easternmarkets and the Electricity Reliability Council of Texas. At longer time horizons theseseparations disappear. Palo Verde is the important spot market in the west for pricediscovery. Southwest Power Pool is the dominant market in Eastern InterconnectedSystem for price discovery.Interdependencies among eight major natural gas spot markets are investigatedusing a vector error correction model and the Greedy Equivalence Search Algorithm inChapter III. Findings suggest that the eight price series are tied together through sixlong-run cointegration relationships, supporting the argument that the natural gas markethas developed into a single integrated market in North America since deregulation.Results indicate that price discovery tends to occur in the excess consuming regions andmove to the excess producing regions. Across North America, the U.S. Midwest region,represented by the Chicago spot market, is the most important for price discovery. TheEllisburg-Leidy Hub in Pennsylvania and Malin Hub in Oregon are important for easternand western markets.In Chapter IV, a threshold vector error correction model is applied to the naturalgas markets to examine nonlinearities in adjustments to the law of one price. Resultsshow that there are nonlinear adjustments to the law of one price in seven pair-wisemarkets. Four alternative cases for the law of one price are presented as a theoreticalbackground. A methodology is developed for finding a threshold cointegration modelthat accounts for seasonality in the threshold levels. Results indicate that dynamicthreshold effects vary depending on geographical location and whether the markets areexcess producing or excess consuming markets.