Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management

Riadh Aloui, Mohamed Ben Aissa (), Shawkat Hammoudeh and Duc Khuong Nguyen

No 2014-590, Working Papers from Department of Research, Ipag Business School

Abstract: In this article, we show how the copula-GARCH approach can be appro- priately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for port- folio risk management in extreme economic conditions. Using daily price data from January 1997 to October 2011, our in-sample results show evi- dence of asymmetric dependence between the two markets. The crude oil and gas markets tend to co-move closely together during bullish periods, but not at all during bearish periods. Moreover, taking the extreme comovement into account leads to an improvement in the accuracy of the out-of-sample Value-at-Risk forecasts.

Keywords: Copulas; extreme dependence measures; crude oil; natural gas; VaR. (search for similar items in EconPapers)
JEL-codes: C51 C58 Q41 Q47 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2014-01-01
New Economics Papers: this item is included in nep-ene and nep-rmg
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Citations: View citations in EconPapers (37)

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Journal Article: Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management (2014)
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