Volatility transmission in energy futures markets

Abstract

This study is novel in the application of a multivariate HAR-GARCH model for studying volatility transmission patterns in energy futures markets. In particular, the nature of volatility spillovers between futures on crude oil, natural gas and gas-oil is examined 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 ICE and reveal interesting insights in the sources of the documented volatility interrelations. Short-term shocks in Brent oil volatility significantly affect the volatility of gas-oil futures, while the impact of oil and gas-oil on natural gas is driven by the long-term volatility component. Additionally, Brent oil and gas-oil ICE futures volatilities exhibit strong positive dynamic correlation, whereas the remaining pairwise correlation curves are fluctuating around zero.