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Fundamental and Financial Influences on the Co-movement of Oil and Gas Prices

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  • Sévi, Benoît
  • Le Pen, Yannick
  • Chevallier, Julien
  • Bunn, Derek

Abstract

As both speculative and hedging financial flows into commodity futures are expected to link commodity price formation more strongly to equity indices, we investigate whether these processes also create increased correlation amongst the commodities themselves. Considering U.S. oil and gas futures, using the large approximate factor models methodology we investigate whether common factors derived from a large international dataset of real and nominal macro variables are able to explain both returns and whether, beyond these fundamental common factors, the residuals remain correlated. We further investigate a possible explanation for this residual correlation by using some proxies for hedging and speculative activity, showing that speculation increases and hedging reduces the inter-commodity correlations.

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Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/11692.

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Date of creation: Sep 2013
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Publication status: Published in Cahiers de recherche du CREDEN, 2013
Handle: RePEc:dau:papers:123456789/11692

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Keywords: Oil Futures; Gas Futures; Common Factors; Approximate Factor Models; Excess Comovement;

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