Testing Co-Volatility Spillovers for Natural Gas Spot, Futures and ETF Spot using Dynamic Conditional Covariances
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|
|JEL||Financial Econometrics (jel C58), Financial Markets (jel D53), Contingent Pricing; Futures Pricing (jel G13), Capital Budgeting; Investment Policy (jel G31), Agriculture; Natural Resources; Energy; Environment; Other Primary Products (jel O13)|
|Series||Econometric Institute Research Papers|
|Note||The authors are grateful to Leh-Chyan So for helpful comments and suggestions. For financial support, the first author wishes to thank the National Science Council, Taiwan, and the second author acknowledges the Australian Research Council and the National Science Council, Taiwan.|
Chang, C-L, McAleer, M.J, & Wang, Y. (2016). Testing Co-Volatility Spillovers for Natural Gas Spot, Futures and ETF Spot using Dynamic Conditional Covariances (No. EI2016-29). Econometric Institute Research Papers. Retrieved from http://hdl.handle.net/1765/93116