The Russia–Ukraine war and energy market volatility: A novel application of the volatility ratio in the context of natural gas

Abstract

The major aim of this paper is to analyze the influence of the recent Russia–Ukraine war on the volatility dynamics of the natural gas market for the 1 June 2011–31 December 2022 period. Given the emergence of the S&P GSCI Natural Gas as the first most dominant energy natural gas market in the World, we use the daily return data of the S&P GSCI natural gas index for the empirical analysis. As a novel approach, we apply the Volatility Ratio, a contemporary technical statistic measure, to assess the behavior of the volatility-of-volatility at different time horizons in the natural gas market. Empirical findings of this paper reveal that the volatility-of-volatility had been rapidly dying down before the war, subsequently taking a longer time to die down in the S&P GSCI natural gas index. Further, the findings imply that periods of uncertainties trigger investors’ intent to make some best possible decisions and formulate superior strategies, without necessarily displaying any herding tendency of imitating their counterparts. Being the first study to apply the new volatility ratio analysis in accomplishing the aim of this research, our findings lay an economic foundation for necessary policy formulation and interventions to safeguard the energy market investors and counteract detrimental effects on society and economy at large, in the wake of any future Black Swan events such as the Russia–Ukraine conflict and the COVID-19 pandemic.