Testing directional predictability between energy prices: A quantile-based analysis

Abstract

We evaluate the relationship between various energy markets at different quantiles of their respective return distributions by employing the recently developed cross-quantilogram method and the quantile Granger causality test. Three important open questions in the energy literature are revisited, namely, the “decoupling” of crude oil and natural gas prices, the mixed relationship between natural gas and electricity prices, and the “rockets and feathers” effect between crude oil and petroleum product prices. We find positive and significant spillover effects from crude oil to natural gas during bearish market conditions, which have weakened after 2013, suggesting a possible delink between the two markets in recent years. We further find a bi-directional causality at different market conditions for natural gas and electricity returns, especially at moderate and high return quantiles. However, in recent years the two markets have become more correlated during periods with low returns due to the transition of the natural gas power plants from peak to baseload facilities. Finally, our results do not find evidence for the “rockets and feathers” effect from crude oil to either the gasoline or heating oil market as we do not observe more significant spillovers during bullish market conditions.