Frequency Volatility Connectedness and Portfolio Hedging of U.S. Energy Commodities

29 Pages Posted: 3 Jul 2023

See all articles by Evžen Kočenda

Evžen Kočenda

Charles University in Prague - Institute of Economic Studies; Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics; CESifo; University of Regensburg - Institute for East and Southeast European Studies

Michala Moravcova

Masaryk University

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Abstract

We analyze (frequency) connectedness and portfolio hedging among U.S. energy commodities from 1997 to 2023. We show that total connectedness has a rising trend, suggesting that the financialization of the energy commodity market deepens its volatility connectedness. We find that the early stage of the Russia-Ukraine war and the Covid-19 pandemic are associated with the highest systemic risk in the energy commodity market, followed by the GFC. The results of directional volatility spillovers reveal that heating oil is the dominant asset as a volatility receiver and transmitter. In contrast, natural gas volatility is strongly affected by its own historical volatility. Considering frequency decomposition, the long-term component plays a major role, particularly during distress periods of the GFC, the Covid-19 pandemic, and the Russia-Ukraine war; the short-term component plays a minor role. Finally, adding natural gas into an energy portfolio brings diversification benefits due to the lowest hedging costs.

Keywords: Volatility spillovers, frequency decomposition, portfolio weights, hedge ratios, energy commodities, distress

Suggested Citation

Kocenda, Evzen and Moravcova, Michala, Frequency Volatility Connectedness and Portfolio Hedging of U.S. Energy Commodities. Available at SSRN: https://ssrn.com/abstract=4488110 or http://dx.doi.org/10.2139/ssrn.4488110

Evzen Kocenda

Charles University in Prague - Institute of Economic Studies ( email )

Opletalova St. 26
Prague, 11000
Czech Republic

HOME PAGE: http://kocenda.fsv.cuni.cz

Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

CESifo

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Munich, DE-81679
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University of Regensburg - Institute for East and Southeast European Studies

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Regensburg, 93047
Germany

Michala Moravcova (Contact Author)

Masaryk University ( email )

Zerotinovo nam. 9
60177 Brno, 603 00
Czech Republic

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