Cross-Hedge Efficiency in the Iberian Gas Market: Evaluating the Role of TTF and NBP in Mitigating Price Volatility

Abstract

Abstract This study evaluates the hedging effectiveness of TTF and NBP against price volatilities in the Iberian Peninsula's natural gas market (PVB). The methodology includes a comparative analysis of five hedging strategies, including the simple minimum variance approach and the more sophisticated BEKK model, which belongs to the GARCH family. The analysis shows that TTF and NBP serve as efficient hedging instruments, demonstrating in particular their effectiveness as cross-hedging tools in liquidity-constrained markets such as MIBGAS (Iberian Gas Market). In particular, the study finds that simpler models can provide hedge effectiveness comparable to that of more complex models. From a practical point of view, the results advocate that market participants use a mix of hedging strategies and dynamic approaches to manage market volatility. In addition, the study underscores the critical role of regulatory frameworks in fostering market integration and improving liquidity, providing valuable insights for market participants navigating the complexities of natural gas markets.