Quantifying information transfer between Commodities and Implied Volatilities in the Energy Markets: A Multi-frequency Approach

Thobekile Qabhobho, Emmanuel Asafo-Adjei, Peterson Owusu Junior and Anokye M. Adam
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Thobekile Qabhobho: Department of Economics, Faculty of Business and Economic Sciences, Nelson Mandela University, Port Elizabeth, South Africa,
Emmanuel Asafo-Adjei: Department of Finance, School of Business, University of Cape Coast, Cape Coast, Ghana.
Anokye M. Adam: Department of Finance, School of Business, University of Cape Coast, Cape Coast, Ghana.

International Journal of Energy Economics and Policy, 2022, vol. 12, issue 5, 472-481

Abstract: We investigate the multi-scale information transmission between two implied volatilities in the energy markets (crude oil volatility and volatility in the energy market) and energy commodities returns (global energy commodity, brent, heating oil, natural gas and petroleum). The Complete Ensemble Empirical Mode Decomposition with Adaptive Noise (CEEMDAN) based R nyi transfer entropy approach is employed to accomplish the research objective. The study s outcome underscores that information flow between implied volatilities and energy commodities is negative with significance being scale-dependent. Especially, significant negative information flow is found at specific intrinsic mode functions (IMFs) such as IMF1, and from IMFs 6-9 suggesting short-, upper medium and long-term energy markets dynamics. Comparatively, we find profound negative information flow with the crude oil implied volatility than the volatility in the entire energy market implying the former s strong hedging benefits. Investors and policymakers should have knowledge about the dynamics of implied volatilities, particularly, the crude oil implied volatility when designing strategies for the energy commodities markets.

Keywords: Crude oil implied volatility; Bi-directional causality; R nyi transfer entropy; heterogeneity (search for similar items in EconPapers)
JEL-codes: G10 G15 G19 O13 (search for similar items in EconPapers)
Date: 2022
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