Volatility spillover between oil and energy commodities
Date
2022
Authors
Wei, Dongfang
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Abstract
Energy is an indispensable resource for economic development and one of the main concerns of market participants and academics. The extreme volatility of energy prices, especially those triggered by the financial crisis in 2008 and the COVID-19 epidemic in 2020, makes it important to investigate the volatility spillover between energy markets.
Oil, natural gas and ethanol are chosen for this paper because the rise and fall in oil prices have a profound impact on a country's financial system. In addition, natural gas and ethanol are substitutes for oil, which have been shown in the earlier literature to have a long-term relationship with oil prices. This relationship has changed subsequent to the financial crisis.
The study analyses the volatility spillover and dynamic correlation between oil and natural gas and ethanol markets using VAR-BEKK-GARCH and VAR-DCC-GARCH models with weekly frequencies from June 2005 to December 2020. The sample is divided into five subintervals using the two significant events mentioned above as crisis periods.
The empirical results of the study show that there is a bidirectional volatility spillover from the oil to ethanol and natural gas markets during the full sample period. The volatility spillover results vary across markets in different subperiods, but there are more significant cases in the crisis and post-crisis periods. The average dynamic correlation coefficients between these three markets are low, which however increases to a higher figure during the crisis period.
Description
A research project submitted in partial fulfilment of the requirements for the degree of Master of Management in Finance and Investments to the Faculty of Commerce, Law and Management,University of the Witwatersrand,