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Multivariate dependence and spillover effects across energy commodities and diversification potentials of carbon assets

Gazi Uddin (), Jose Areola Hernandez, Syed Jawad Hussain Shahzad () and Axel Hedström
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Jose Areola Hernandez: Rennes School of Business

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Abstract: In a first step, we model the multivariate tail dependence structure and spillover effects across energy commodities such as crude oil, natural gas, ethanol, heating oil, coal and gasoline using canonical vine (C-vine) copula and c-vine conditional Value-at-Risk (CoVaR). In the second step, we formulate portfolio strategies based on different performance measures to analyze the risk reduction and diversification potential of carbon assets for energy commodities. We identify greater exposure to losses arising from investments in heating oil and ethanol markets. We also find evidence of carbon asset providing diversification benefits to energy commodity investments. These findings motivate for regulatory adjustments in the trading and emission permits for the energy markets most strongly diversified by carbon assets.

Keywords: Carbon assets; Energy commodities; Tail dependence; Risk spillover (search for similar items in EconPapers)
Date: 2018-03
Note: View the original document on HAL open archive server: https://hal-rennes-sb.archives-ouvertes.fr/hal-01996386
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Published in Energy Economics, Elsevier, 2018, 71, pp.35-46. ⟨10.1016/j.eneco.2018.01.035⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01996386

DOI: 10.1016/j.eneco.2018.01.035

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