Influence of Fluctuations in Fossil Fuel Commodities on Electricity Markets: Evidence from Spot and Futures Markets in Europe

Tiantian Liu, Xie He, Tadahiro Nakajima and Shigeyuki Hamori
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Tiantian Liu: Graduate School of Economics, Kobe University, Kobe 657-8501, Japan
Xie He: Graduate School of Economics, Kobe University, Kobe 657-8501, Japan

Energies, 2020, vol. 13, issue 8, 1-20

Abstract: Using a fresh empirical approach to time-frequency domain frameworks, this study analyzes the return and volatility spillovers from fossil fuel markets (coal, natural gas, and crude oil) to electricity spot and futures markets in Europe. In the time domain, by an approach developed by Diebold and Yilmaz (2012) which can analyze the directional spillover effect across different markets, we find natural gas has the highest return spillover effect on electricity markets followed by coal and oil. We also find that return spillovers increase with the length of the delivery period of electricity futures. In the frequency domain, using the methodology proposed by Barunik and Krehlik (2018) that can decompose the spillover effect into different frequency bands, we find most of the return spillovers from fossil fuels to electricity are produced in the short term while most of the volatility spillovers are generated in the long term. Additionally, dynamic return spillovers have patterns corresponding to the use of natural gas for electricity generation, while volatility spillovers are sensitive to extreme financial events.

Keywords: electricity; crude oil; natural gas; coal; spillover effects (search for similar items in EconPapers)
JEL-codes: Q Q0 Q4 Q40 Q41 Q42 Q43 Q47 Q48 Q49 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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