An application of copulas to OPEC’s changing influence on fossil fuel prices

Abstract

This work examines how the dependence structures between energy futures asset prices differ in two periods identified before and after the 2008 global financial crisis. These two periods were characterized by a difference in the number of extraordinary meetings of OPEC countries organized to announce a change of oil production. In the period immediately following the global financial crisis, the decrease in oil prices and oil and gas demand forced OPEC countries to make frequent adjustments to the production of oil, while, since the first quarter of 2010, the recovery led to more regular meetings, with only three organized extraordinary meetings. We propose to use a copula model to study how the dependence structure among energy prices changed among the two periods. The use of copula models allows to introduce flexible and realistic models for the marginal time series; once marginal parameters are estimated, the estimates are used to fit several copula models for all asset combinations. Model selection techniques based on information criteria are implemented to choose the best models both for the univariate asset prices series and for the distribution of co-movements. The changes in the dependence structure of couple of assets are investigated through copula functionals and their uncertainty estimated through a bootstrapping method. We find the strength of dependence between asset combinations considerably differ between the two periods, showing a significant decrease for all the pairs of assets.