Volatility transmission in energy futures markets

Michael Soucek and Neda Todorova

Abstract

ABSTRACT

This study is novel in its application of a multivariate heterogeneous autoregressive model to studying volatility transmission patterns in energy futures markets. In particular, the nature of volatility spillovers between futures on crude oil, natural gas and gasoil is examined by using range-based volatility proxies and splitting volatility in components defined over different time horizons. The results provide evidence that crude oil futures carry significant information for the volatility evolution of other energy futures traded on the Intercontinental Exchange (ICE) and reveal interesting insights into the sources of the documented volatility interrelations. Short-term shocks in Brent oil volatility significantly affect the volatility of gasoil futures, while the impact of oil and gasoil on natural gas is driven by the long-term volatility component. Additionally, Brent oil and gasoil ICE futures volatilities exhibit strong positive dynamic correlation, whereas the remaining pairwise correlation curves fluctuate around zero.