Testing co-volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances

Chia-Lin Chang (), Michael McAleer and Yanghuiting Wang
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Yanghuiting Wang: Institute of Statistics National Tsing Hua University, Taiwan.

No 2016-10, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: There is substantial empirical evidence that energy and financial markets are closely connected. As one of the most widely-used energy resources worldwide, natural gas has a large daily trading volume. In order to hedge the risk of natural gas spot markets, a large number of hedging strategies can be used, especially with the rapid development of natural gas derivatives markets. These hedging instruments include natural gas futures and options, as well as Exchange Traded Fund (ETF) prices that are related to natural gas stock prices. The volatility spillover effect is the delayed effect of a returns shock in one physical, biological or financial asset on the subsequent volatility or co-volatility of another physical, biological or financial asset. Investigating volatility spillovers within and across energy and financial markets is a crucial aspect of constructing optimal dynamic hedging strategies. The paper tests and calculates spillover effects among natural gas spot, futures and ETF markets using the multivariate conditional volatility diagonal BEKK model. The data used include natural gas spot and futures returns data from two major international natural gas derivatives markets, namely NYMEX (USA) and ICE (UK), as well as ETF data of natural gas companies from the stock markets in the USA and UK. The empirical results show that there are significant spillover effects in natural gas spot, futures and ETF markets for both USA and UK. Such a result suggests that both natural gas futures and ETF products within and beyond the country might be considered when constructing optimal dynamic hedging strategies for natural gas spot prices.

Keywords: Energy; Natural gas; Spot; Futures; ETF; NYMEX; ICE; Optimal hedging strategy; Covolatility spillovers; Diagonal BEKK. (search for similar items in EconPapers)
JEL-codes: C58 D53 G13 G31 O13 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016-06
New Economics Papers: this item is included in nep-ene and nep-ger
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https://eprints.ucm.es/id/eprint/38281/1/1610.pdf (application/pdf)

Related works:
Journal Article: Testing Co-Volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances (2018)
Working Paper: Testing Co-Volatility Spillovers for Natural Gas Spot, Futures and ETF Spot using Dynamic Conditional Covariances (2016)
Working Paper: Testing Co-Volatility Spillovers for Natural Gas Spot, Futures and ETF Spot using Dynamic Conditional Covariances (2016)
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