Dynamic frequency connectedness between oil and natural gas volatilities

The goal of this paper is twofold. First, we study dynamic volatility connectedness between oil and natural gas over the period 1994 to 2018. Second, we examine the frequency dynamics of the transmission mechanism arising from frequency-specific responses to volatility shocks. To do so, we adopt a newly introduced approach that decomposes connectedness measures based on variance decompositions into their components at different frequency ranges. Our results summarize as follows: (a) there is a substantial variation in volatility spillovers over time; (b) the natural gas market was a net transmitter during the central part of our sample period; (c) the magnitude of spillovers was smaller after the financial crisis, but volatilities are not decoupled. (d) The volatility propagation mechanism is frequency dependent. Connectedness is typically created at low-frequencies, with volatility shocks across markets having long-lasting effects. However, during some specific periods, such as after Katrina, volatility was transmitted much faster, with shocks dissipating in the short-run.