Re-Examining Crude Oil and Natural Gas Price Relationship : Evidence from Time-Varying Regime-Switching Models

In this paper, we examine the relationship between crude oil and natural gas prices. Using smooth transition regression modelling approach, we find that both the long-run and short-run relationships between oil and gas prices are more aptly modelled by simultaneous structural breaks and regime-dependent nonlinearities. Our results imply that the natural gas prices did not decouple from crude oil prices in the sense that the long-run equilibrium relationship between the two prices did not break completely but instead moved to a new level. The structural shift in the equilibrium relationship between oil and gas prices was rather slow. We also find that both the long-run and short-run effects of crude oil prices on natural gas prices have fallen significantly after the break. In addition, the relationship between the two prices became more volatile after the break