Interplay of multifractal dynamics between shadow policy rates and energy markets

Faheem Aslam, Ahmed Hunjra (), Bilal Ahmed Memon and Mingda Zhang

The North American Journal of Economics and Finance, 2024, vol. 71, issue C

Abstract: This study examines the interconnections between short shadow rates (SSR) and energy markets. We conduct multifractal detrended cross-correlation analysis (MF-DXA) on the daily SSR from four major economies (USA, Eurozone, Japan, and UK) and the daily prices of four energy markets (WTI, Brent, Natural Gas, and Heating Oil) spanning January 1995 to March 2022. Our analysis shows that all energy market-short shadow rate pairs display significant multifractal characteristics. The presence of power law cross-correlation suggests that substantial changes in short shadow rates are associated with significant price changes in energy markets. The highest multifractal cross-correlation is observed between energy prices and shadow short rates of Japan and the US. Energy markets demonstrate persistent cross-correlations for small fluctuations compared to large fluctuations. However, the rolling windows analysis reveal a shift from persistent to anti-persistence cross-correlations during global financial crises (GFC), the 2014–2016 energy crises and the COVID-19 pandemic. Lastly, the cross-correlation exhibit positive skewness. We suggest that integrating these long-term dependency features into financial analysis has the potential to support decision-making for market participants.

Keywords: Short Shadow Rates; Energy Prices; Monetary Policy; Cross Correlation Analysis (search for similar items in EconPapers)
JEL-codes: C32 F4 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:71:y:2024:i:c:s1062940824000093

DOI: 10.1016/j.najef.2024.102085

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