Regime-dependent connectedness in European natural gas markets: evidence from quantile VAR analysis

Purpose Tthe British National Balancing Point (NBP), Dutch Title Transfer Facility (TTF), Trading Hub Europe (THE) and Italian Punto di Scambio Virtuale (PSV) – under low- and high-volatility regimes. This study aims to uncover how shock transmission patterns shift across stress and stress-free periods. Design/methodology/approach The empirical strategy is structured in three complementary stages. First, a Markov switching model is employed to estimate the likelihood of the system being in either a low-volatility or a high-volatility regime. Second, a time-varying parameter vector autoregressive (TVP-VAR) connectedness approach is applied to capture structural changes in the data while avoiding the information loss that can result from arbitrary subsample selection or rolling-window estimation. Finally, a quantile-VAR connectedness framework is implemented to measure nonlinear and asymmetric spillovers across different market conditions. Findings Findings show that connectedness among European natural gas markets intensifies markedly in high-volatility regimes. In low-volatility periods, TTF acts as a net shock receiver, whereas NBP, THE and PSV serve as net transmitters. During high-volatility regimes, all markets except PSV shift to net receivers. Connectedness surges during major global events, underscoring the markets’ vulnerability to systemic shocks. The quantile-connectedness results show particularly strong connectedness in bearish (lower-quantile) conditions. Before COVID-19, TTF and THE acted as net transmitters, while NBP and PSV served as net receivers regardless of market conditions. However, European natural gas markets’ roles as shock transmitters or receivers were significantly influenced by the pandemic, Russia-Ukraine conflict and Israel-Palestine conflict. Practical implications Understanding how shock transmission varies across volatility regimes provides valuable insights for market participants. Market participants (including traders and portfolio managers) should recognize that interdependence among European gas hubs intensifies during turbulent periods, and that the directional magnitude of transmission of shocks among European hubs evolve over time. For investors, awareness of how shocks propagate across markets under different market conditions (bullish or bearish) can enhance hedging efficiency and portfolio diversification. For regulators, the results highlight the importance of closely monitoring the TTF hub, which plays a central role in shaping the dynamics and systemic risk of the European gas market. Originality/value This paper contributes to the literature by providing a novel examination of interconnectedness among major European natural gas markets across different volatility regimes. Unlike previous studies that assume constant relationships, this paper integrates a Markov switching framework with a TVP-VAR and a quantile-VAR connectedness approach to capture regime shifts, time variation and nonlinear spillovers simultaneously. By distinguishing between low- and high-volatility periods, the study reveals how shock transmission patterns change during stress and tranquil market conditions. The analysis also relies on the impact of major geopolitical and global events on the connectedness across European natural gas hubs.