Information Spillover Dynamics of the Energy Futures Market Sector: A Novel Common Factor Approach

49 Pages Posted: 26 May 2015 Last revised: 12 Jun 2016

See all articles by Duminda Kuruppuarachchi

Duminda Kuruppuarachchi

University of Sri Jayewardenepura

I. M. Premachandra

University of Otago - Department of Accountancy and Finance

Date Written: June 11, 2016

Abstract

We investigate sector level information spillover dynamics between energy and other futures market sectors using a novel common factor approach. The heteroscedastic principal component common factors are derived for each market sector using the daily returns of 176 leading futures contracts traded globally during the period 2005-2011 and used them in our analysis. We find that energy sector has the highest degree of commonality among the 8 sectors that we studied. Conditional correlations between energy and non-energy futures market sectors are highly persistent. Granger causality tests in mean, variance, and value at risk reveal that the volatility spillover from the energy sector is more prominent than the mean and extreme market risk spillovers. Extreme energy market shocks have an asymmetric effect on some non-energy market sectors. Impulse response analysis reveals that shocks to energy futures have a significant potential impact on other sectors especially during GFC and EUC crisis. The impact of the extreme market events of the energy sector is dominated by WTI oil futures. Consistency of our findings with the existing literature based on individual asset-to-asset spillovers reveals that our results are quite robust. The proposed common factors are important for other applications as well such as benchmark indices in marker sector-specific asset pricing models.

Keywords: Information spillover, energy futures, Granger causality, principle component factors, impulse response functions

JEL Classification: C10, E32, E44, G01, G15, Q40

Suggested Citation

Kuruppuarachchi, Duminda and Premachandra, I. M., Information Spillover Dynamics of the Energy Futures Market Sector: A Novel Common Factor Approach (June 11, 2016). Available at SSRN: https://ssrn.com/abstract=2610385 or http://dx.doi.org/10.2139/ssrn.2610385

Duminda Kuruppuarachchi (Contact Author)

University of Sri Jayewardenepura ( email )

Sri Lanka

I. M. Premachandra

University of Otago - Department of Accountancy and Finance ( email )

PO Box 56
Dunedin, 9054
New Zealand

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