Identifying Drivers of Liquidity in the NBP Month-ahead Market

de Menezes, L. M., Russo, M. & Urga, G. (2016). Identifying Drivers of Liquidity in the NBP Month-ahead Market. Paper presented at the EcoMod2016, 06 Jul 2016 - 08 Jul 2016, Lisbon, Portugal.

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Abstract

This study investigates the associations between measures of market quality such as liquidity, trading activity and volatility in the one-month-ahead forward market of the UK’s National Balancing Point (NBP), from May 2010 to December 2014. The period of analysis includes when the EU Regulation on Market Integrity and Transparency (REMIT) came into force, hence, whether there were changes in the associations between those measures that could reflect REMIT is also investigated. Consistent with microstructure theory, a positive association between trading activity and volatility plus a negative association between volatility and subsequent liquidity are found. This is in line with the argument that in times of high trading activity and volatility, spread rises and market depth deteriorates, with implications for the costs of hedging and investment decisions. The results imply time-varying associations, but no significant differences were found in the dynamic of correlations between trading activity, volatility and liquidity after REMIT. From an energy policy perspective, the extent to which changes in liquidity might further nourish the effects of price fluctuations has implications for the competitiveness and efficiency of European natural gas markets.

Item Type: Conference or Workshop Item (Paper)
Additional Information: © 2016 The Authors
Uncontrolled Keywords: European natural gas markets, liquidity, market microstructure
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
Divisions: Cass Business School > Faculty of Finance
Cass Business School > Faculty of Management
URI: http://openaccess.city.ac.uk/id/eprint/17017

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