Time-varying correlations in oil, gas and CO2prices: an application using BEKK, CCC and DCC-MGARCH models
- 1 November 2012
- journal article
- research article
- Published by Taylor & Francis Ltd in Applied Economics
- Vol. 44 (32), 4257-4274
- https://doi.org/10.1080/00036846.2011.589809
Abstract
Previous literature has identified oil and gas prices as being the main drivers of CO2 prices in a univariate Generalized Autoregressive Conditional Heteroscedasticity (GARCH) econometric framework (Alberola et al., 2008; Oberndorfer, 2009). By contrast, we argue in this article that the interrelationships between energy and emissions markets shall be modelled in a Vector Autoregressive (VAR) and Multivariate GARCH (MGARCH) framework, so as to reflect the dynamics of the correlations between the oil, gas and CO2 variables overtime. Using the Baba–Engle–Kraft–Kroner (BEKK), Constant Conditional Correlation (CCC) and Dynamic Conditional Correlation MGARCH (DCC-MGARCH) models on daily data from April 2005 to December 2008, we highlight significant own-volatility, cross-volatility spillovers, and own persistent volatility effects for nearly all markets, indicating the presence of strong Autoregressive Conditional Heteroscedasticity (ARCH) and GARCH effects. Besides, we provide strong empirical evidence of time-varying correlations in the range of [−0.3; 0.3] between oil and gas, [−0.05; 0.05] between oil and CO2, and [−0.2; 0.2] between gas and CO2, that have not been considered by previous studies. These findings are of interest for traders and utilities in the energy sector, but also for a broader applied economics audience.Keywords
Other Versions
This publication has 18 references indexed in Scilit:
- Declining US output volatility and its effect on labour flow volatility: an MGARCH analysisApplied Economics, 2010
- European Carbon Prices and Banking Restrictions: Evidence from Phase I (2005-2007)The Energy Journal, 2009
- Student-tdistribution based VAR-MGARCH: an application of the DCC model on international portfolio risk managementApplied Economics, 2008
- Price drivers and structural breaks in European carbon prices 2005–2007Energy Policy, 2008
- Dynamic Conditional CorrelationJournal of Business & Economic Statistics, 2002
- Multivariate Simultaneous Generalized ARCHEconometric Theory, 1995
- The Cusum Test with Ols ResidualsEconometrica, 1992
- Modelling the Coherence in Short-Run Nominal Exchange Rates: A Multivariate Generalized Arch ModelThe Review of Economics and Statistics, 1990
- Modelling the persistence of conditional variancesEconometric Reviews, 1986
- Macroeconomics and RealityEconometrica, 1980