Temporal dynamics of volatility spillover: The case of energy - - PowerPoint PPT Presentation

Temporal dynamics of volatility spillover:

The case of energy markets Roy Endré Dahl Atle Oglend University of Stavanger University of Stavanger Norway - 4036 Stavanger Norway - 4036 Stavanger roy.e.dahl@uis.no atle.oglend@uis.no Muhammad Yahya Sindre Lorentzen University of Stavanger University of Stavanger Norway - 4036 Stavanger Norway - 4036 Stavanger muhammad.yahya@uis.no sindre.lorentzen@uis.no

Muhammad Yahya Temporal dynamics of volatility spillover: 1 / 19

Table of Content

1 Abstract 2 Introduction 3 Research Questions 4 Literature review 5 Methodology 6 Data and descriptives 7 Descriptive statistics 8 Empirical analysis 9 Conclusion 10 Q&A

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Abstract

Examines the volatility spillover between the five energy markets using futures data from July 2001 to June 2016. Investigate how the change in price and return dynamics of energy commodities affects each other. Spillover is relatively stable over time. Increases significantly during the period of financial and economic turmoil. Crude oil and Heating oil significantly influence the volatility in other energy commodities. Finally, short-term events tends to have major influence on spillover dynamics.

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Introduction

Transmission of volatility or volatility spillover has been a debated topic within both financial and commodity literature. Studies in volatility spillover receives considerably less attention. Understanding the dynamics of time-varying volatility transmission is crucial for:

investment allocation asset valuation risk management and policymaking

We examine spillover between the five energy commodities: crude oil, natural gas, coal, gasoline, and heating oil. Phenomenon of volatility spillover is time-varying and recent decline in oil price necessitate the evaluation of volatility spillover between the energy commodities.

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Research Question

Describe the prevalence and inherit characteristics of bidirectional static and temporal volatility spillover between the energy nexus. Providing an overview how the recent decline in crude oil price has changed the spillover dynamics between the energy commodities. Offer policy recommendation aimed at augmenting decision-making for private and institutional investors. Empirically investigate the historical claim of volatility transmission from crude oil. As pointed by Asche et al. (2012), it is important to understand the development of relationship between natural gas and coal, because natural gas is often considered a substitute to coal.

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Literature review

Study Assets/Markets Data Method Results Malik and U.S. equity market, crude 1994–2001 MGARCH Significant Hammoudeh (2007)

• il, and Gulf markets

(Daily) Baffes (2007) Crude oil and 35 1960–2005 OLS Significant

• ther commodities

(Annual) Serra (2011) Crude oil, ethanol, and 2000–2009 GARCH Significant sugar prices in Brazil (Weekly) Kaltalioglu et Oil price, agricultural co- 1980–2008 VAR Insignificant

• al. (2011)

mmodities and food items (Monthly) Lin and Li (2015) Crude oil and 1992–2012 VECM Significant natural gas markets (Monthly) MGARCH Diaz et al. (2016) Crude oil and stock 1970–2014 VAR Insignificant returns in G7 countries (Monthly) Liu et al. (2017) Crude oil, MICEX, 2003–2014 GARCH–BEKK Insignificant and S&P 500 (Daily) Kang et al. (2017) Crude oil, gold, silver, 2002–2012 DY (2009, 2012) Insignificant corn, wheat, and rice (Weekly) Muhammad Yahya Temporal dynamics of volatility spillover: 6 / 19

Methodology I

Following Diebold and Yilmaz (2012, 2009), we can estimate the volatility spillover as: xt =

p

• i=1

φixt−i + εt where ε ∼ (0,

• )

(1) Equation 2 provides H-step-ahead forecast error variance decomposition: θg

ij(H) =

σ−1

ii H−1

• h=0

(e

′

i Ah

ej)2

H−1

• h=0

(e

′

i Ah

A

′

hej)

(2)

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Methodology II

Estimate of the directional volatility spillovers are as follows: Sg

i·(H) = N

• j=1

i=j

˜ θg

ij(H)

N · 100, Sg

·i (H) = N

• j=1

i=j

˜ θg

ji(H)

N · 100. (3) Equation 4 provides net pairwise spillovers between the assets i and j: Sg

ij (H) =

    

˜ θg

ij(H) N

• k=1

˜ θg

ik(H)

− ˜ θg

ji(H) N

• k=1

˜ θg

jk(H)

     · 100

(4)

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Data and descriptives

Dataset of futures prices of five commodities spanning 07.12.2001 to 03.06.2016. Data chosen from Commodity Research Bureau (CRB). Heating oil, crude oil, gasoline, coal, and natural gas.

• .15
• .1
• .05

.05 .1 1 2 3 4 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 price return

• .2
• .1

.1 .2 50 100 150 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 price return

• .2
• .1

.1 .2 1 2 3 4 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 price return

• .1
• .05

.05 .1 50 100 150 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 price return

• .5

.5 5 10 15 20 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 price return

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Descriptive statistics

Table: Descriptive statistics of daily log returns

Commodity Mean Std dev Skew Kurtosis Min Max JB AC Heating oil 0.05 0.34

• 0.12

5.67

• 0.14

0.10 0.00

• 0.03 (0.03)

Crude oil 0.04 0.36

• 0.13

6.25

• 0.17

0.13 0.00

• 0.05 (0.00)

Gasoline 0.05 0.38

• 0.07

7.45

• 0.17

0.17 0.00

• 0.01 (0.29)

Coal 0.00 0.24

• 0.30

15.13

• 0.12

0.11 0.00 0.12 (0.00) Natural gas

• 0.05

0.73 1.19 20.90

• 0.57

0.58 0.00 0.10 (0.00)

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Empirical analysis

Table: Volatility spillover between energy commodities

To/From Heating Crude Gasoline Coal Natural Sum

• il
• il

gas (Excl.) Heating oil 39.53 31.5 26.49 1.94 0.54 60.47 Crude oil 31.14 39.12 27.22 2.31 0.21 60.88 Gasoline 27.68 28.79 41.29 1.98 0.26 58.71 Coal 4.27 5.06 4.14 86.1 0.42 13.9 Natural gas 2.62 1.87 1.66 0.76 93.09 6.91 Sum (Incl.) 105.23 106.34 100.81 93.11 94.51 Sum (Excl.) 65.71 67.22 59.52 7.01 1.42 Net spillover 5.23 6.34 0.81

• 6.89
• 5.49

Total Spillover Index: 40.17%

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Empirical Analysis

Figure: Directional spillover to commodity i:

55 60 65 70 75 80 Gross directional spillover to heating oil 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0014 p−value = 0.00 R

ADF: p−value = 0.19 PP: p−value = 0.19

(a) Heating oil

50 60 70 80 90 Gross directional spillover to crude oil 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0034 p−value = 0.00 R

ADF: p−value = 0.92 PP: p−value = 0.91

(b) Crude oil

40 50 60 70 80 Gross directional spillover to gasoline 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0026 p−value = 0.00 R

ADF: p−value = 0.49 PP: p−value = 0.54

(c) Gasoline

10 20 30 40 Gross directional spillover to coal 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = 0.0012 p−value = 0.00 R

ADF: p−value = 0.73 PP: p−value = 0.70

(d) Coal

5 10 15 20 Gross directional spillover to natural gas 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0004 p−value = 0.00 R

ADF: p−value = 0.16 PP: p−value = 0.21

(e) Natural gas

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Empirical Analysis

Figure: Net spillover between commodities:

−2 −1 1 2 Pairwise spillover between heating oil and crude oil 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = 0.0005 p−value = 0.00 R

ADF: p−value = 0.85 PP: p−value = 0.86

(a) Heating oil and Crude

• il

−1 1 2 3 4 Pairwise spillover between heating oil and gasoline 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = 0.0003 p−value = 0.00 R

ADF: p−value = 0.10 PP: p−value = 0.11

(b) Heating oil and

Gasoline

−2 2 4 6 Pairwise spillover between heating oil and coal 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0000 p−value = 0.37 R

ADF: p−value = 0.39 PP: p−value = 0.32

(c) Heating oil and Coal

−5 5 10 Pairwise spillover between heating oil and natural gas 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0011 p−value = 0.00 R

ADF: p−value = 0.77 PP: p−value = 0.72

(d) Heating oil and

Natural gas

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Empirical Analysis

Figure: Net spillover between commodities:

−1 1 2 3 4 Pairwise spillover between crude oil and gasoline 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0003 p−value = 0.00 R

ADF: p−value = 0.72 PP: p−value = 0.82

(a) Crude oil and Gasoline

−2 2 4 6 Pairwise spillover between crude oil and coal 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = 0.0000 p−value = 0.02 R

ADF: p−value = 0.57 PP: p−value = 0.59

(b) Crude oil and Coal

−5 5 10 Pairwise spillover between crude oil and natural gas 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0009 p−value = 0.00 R

ADF: p−value = 0.48 PP: p−value = 0.42

(c) Crude oil and Natural

gas

−2 2 4 6 8 Pairwise spillover between gasoline and coal 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 β = −0.0001 p−value = 0.00 R

ADF: p−value = 0.34 PP: p−value = 0.36

(d) Gasoline and Coal

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Empirical Analysis

Figure: Total spillover index:

30 40 50 60 Total volatility spillover (%) 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016

β = −0.0013 p−value = 0.00 R

2 = 0.14 N = 3485

ADF: p−value = 0.84 PP: p−value = 0.85

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Conclusion

Mixed evidence regarding importance of crude oil. We show that most of the energy commodities are connected through volatility spillover. Understanding the temporal dynamic link between the energy commodities is of particular importance to policymakers, regulatory agencies, and market participants. level of spillover is time-variant and appears to be decreasing throughout the sample period. Short-term events tends to have major influence on volatility spillover. Not all commodities are equally important.

For instance, crude oil is a large net transmitter while coal is a net receiver

During the period of financial and economic turmoil, the total volatility spillover between the energy commodities significantly increases.

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Q&A

Thank you for your attention!

(Any questions?)

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References I

Asche, F., A. Oglend, and P. Osmundsen (2012). Gas versus oil prices the impact of shale gas. Energy Policy 47, 117–124. Baffes, J. (2007). Oil spills on other commodities. Resources Policy 32(3), 126–134. Diaz, E. M., J. C. Molero, and F. P. de Gracia (2016). Oil price volatility and stock returns in the G7 economies. Energy Economics 54, 417–430. Diebold, F. X. and K. Yilmaz (2009). Measuring financial asset return and volatility spillovers, with application to global equity markets. The Economic Journal 119(534), 158–171. Diebold, F. X. and K. Yilmaz (2012). Better to give than to receive: Predictive directional measurement of volatility spillovers. International Journal of Forecasting 28(1), 57–66.

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References II

Kang, S. H., R. McIver, and S.-M. Yoon (2017). Dynamic spillover effects among crude oil, precious metal, and agricultural commodity futures

• markets. Energy Economics 62(3), 19–32.

Lin, B. and J. Li (2015). The spillover effects across natural gas and oil markets: Based on the VEC–MGARCH framework. Applied Energy 155, 229–241. Liu, X., H. An, S. Huang, and S. Wen (2017). The evolution of spillover effects between oil and stock markets across multi-scales using a wavelet-based GARCH–BEKK model. Physica A: Statistical Mechanics and its Applications 465, 374–383. Serra, T. (2011). Volatility spillovers between food and energy markets: a semiparametric approach. Energy Economics 33(6), 1155–1164.

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