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 Muhammad Yahya Temporal dynamics of volatility spillover: 2 / 19
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. Muhammad Yahya Temporal dynamics of volatility spillover: 3 / 19
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. Muhammad Yahya Temporal dynamics of volatility spillover: 4 / 19
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. Muhammad Yahya Temporal dynamics of volatility spillover: 5 / 19
Literature review Study Assets/Markets Data Method Results Malik and U.S. equity market, crude 1994–2001 MGARCH Significant Hammoudeh (2007) oil, and Gulf markets (Daily) Crude oil and 35 1960–2005 Baffes (2007) OLS Significant other commodities (Annual) Crude oil, ethanol, and 2000–2009 Serra (2011) GARCH Significant sugar prices in Brazil (Weekly) Kaltalioglu et Oil price, agricultural co- 1980–2008 VAR Insignificant al. (2011) mmodities and food items (Monthly) Crude oil and 1992–2012 VECM Lin and Li (2015) Significant natural gas markets (Monthly) MGARCH Crude oil and stock 1970–2014 Diaz et al. (2016) VAR Insignificant returns in G7 countries (Monthly) Crude oil, MICEX, 2003–2014 Liu et al. (2017) GARCH–BEKK Insignificant and S&P 500 (Daily) Crude oil, gold, silver, 2002–2012 Kang et al. (2017) 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: p � � x t = φ i x t − i + ε t where ε ∼ (0 , ) (1) i =1 Equation 2 provides H-step-ahead forecast error variance decomposition: H − 1 � e j ) 2 σ − 1 ′ � ( e i A h ii θ g h =0 ij ( H ) = (2) H − 1 � A ′ ′ � ( e i A h h e j ) h =0 Muhammad Yahya Temporal dynamics of volatility spillover: 7 / 19
Methodology II Estimate of the directional volatility spillovers are as follows: N N θ g ˜ ˜ θ g � ij ( H ) � ji ( H ) j =1 j =1 i � = j i � = j S g S g i · ( H ) = · 100 , · i ( H ) = · 100 . (3) N N Equation 4 provides net pairwise spillovers between the assets i and j : θ g ˜ θ g ˜ ij ( H ) ji ( H ) S g ij ( H ) = · 100 (4) − N N θ g ˜ θ g ˜ � ik ( H ) � jk ( H ) k =1 k =1 Muhammad Yahya Temporal dynamics of volatility spillover: 8 / 19
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. 150 .1 .2 .2 4 price return price return price return 4 .05 .1 3 .1 3 100 0 0 2 0 2 -.05 50 -.1 1 -.1 1 -.1 -.15 -.2 -.2 0 0 0 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 150 20 price return price return .1 .5 15 .05 100 0 10 0 50 -.05 5 -.1 -.5 0 0 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 1/1/2002 7/1/2005 1/1/2009 7/1/2012 1/1/2016 Muhammad Yahya Temporal dynamics of volatility spillover: 9 / 19
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) Muhammad Yahya Temporal dynamics of volatility spillover: 10 / 19
Empirical analysis Table: Volatility spillover between energy commodities Heating Crude Natural Sum To/From Gasoline Coal oil oil 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% Muhammad Yahya Temporal dynamics of volatility spillover: 11 / 19
Empirical Analysis Figure: Directional spillover to commodity i : 80 90 80 Gross directional spillover to heating oil Gross directional spillover to crude oil Gross directional spillover to gasoline 75 80 70 70 70 60 65 60 50 60 50 55 40 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 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 2 = 0.19 N = 3485 2 = 0.42 N = 3485 β = −0.0026 p−value = 0.00 R 2 = 0.23 N = 3485 β = −0.0034 p−value = 0.00 R ADF: p−value = 0.19 PP: p−value = 0.19 ADF: p−value = 0.92 PP: p−value = 0.91 ADF: p−value = 0.49 PP: p−value = 0.54 (a) Heating oil (b) Crude oil (c) Gasoline 20 40 Gross directional spillover to natural gas Gross directional spillover to coal 15 30 10 20 10 5 0 0 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 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 2 = 0.03 N = 3485 β = −0.0004 p−value = 0.00 R 2 = 0.04 N = 3485 ADF: p−value = 0.73 PP: p−value = 0.70 ADF: p−value = 0.16 PP: p−value = 0.21 (d) Coal (e) Natural gas Muhammad Yahya Temporal dynamics of volatility spillover: 12 / 19
Empirical Analysis Figure: Net spillover between commodities: Pairwise spillover between heating oil and crude oil Pairwise spillover between heating oil and gasoline 4 2 3 1 2 0 1 −1 0 −2 −1 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 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 2 = 0.53 N = 3485 β = 0.0003 p−value = 0.00 R 2 = 0.13 N = 3485 ADF: p−value = 0.85 PP: p−value = 0.86 ADF: p−value = 0.10 PP: p−value = 0.11 (a) Heating oil and Crude (b) Heating oil and oil Gasoline Pairwise spillover between heating oil and natural gas 10 6 Pairwise spillover between heating oil and coal 4 5 2 0 0 −5 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 −2 β = −0.0011 p−value = 0.00 R 2 = 0.41 N = 3485 1/1/2002 1/1/2004 1/1/2006 1/1/2008 1/1/2010 1/1/2012 1/1/2014 1/1/2016 ADF: p−value = 0.77 PP: p−value = 0.72 β = −0.0000 p−value = 0.37 R 2 = 0.00 N = 3485 ADF: p−value = 0.39 PP: p−value = 0.32 (d) Heating oil and (c) Heating oil and Coal Natural gas Muhammad Yahya Temporal dynamics of volatility spillover: 13 / 19
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