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Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management

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  • Aloui, Riadh
  • Aïssa, Mohamed Safouane Ben
  • Hammoudeh, Shawkat
  • Nguyen, Duc Khuong

Abstract

In this article, we show how the copula-GARCH approach can be appropriately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for portfolio risk management in extreme economic conditions. Using daily price data from January 1997 to October 2011, our in-sample results show evidence of asymmetric dependence between the two markets. The crude oil and gas markets tend to comove closely together during bullish periods, but not at all during bearish periods. Moreover, taking the extreme comovement into account leads to an improvement in the accuracy of the out-of-sample Value-at-Risk forecasts.

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  • Aloui, Riadh & Aïssa, Mohamed Safouane Ben & Hammoudeh, Shawkat & Nguyen, Duc Khuong, 2014. "Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management," Energy Economics, Elsevier, vol. 42(C), pages 332-342.
  • Handle: RePEc:eee:eneeco:v:42:y:2014:i:c:p:332-342 DOI: 10.1016/j.eneco.2013.12.005
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    Cited by:

    1. Guo, Yanfeng & Wen, Xiaoqian & Wu, Yanrui & Guo, Xiumei, 2016. "How is China's coke price related with the world oil price? The role of extreme movements," Economic Modelling, Elsevier, vol. 58(C), pages 22-33.
    2. Lahiani, Amine & Miloudi, Anthony & Benkraiem, Ramzi & Shahbaz, Muhammad, 2017. "Another look on the relationships between oil prices and energy prices," Energy Policy, Elsevier, vol. 102(C), pages 318-331.
    3. Bekiros, Stelios & Nguyen, Duc Khuong & Sandoval Junior, Leonidas & Uddin, Gazi Salah, 2017. "Information diffusion, cluster formation and entropy-based network dynamics in equity and commodity markets," European Journal of Operational Research, Elsevier, vol. 256(3), pages 945-961.
    4. Sensoy, Ahmet & Hacihasanoglu, Erk & Nguyen, Duc Khuong, 2015. "Dynamic convergence of commodity futures: Not all types of commodities are alike," Resources Policy, Elsevier, pages 150-160.
    5. repec:eee:eneeco:v:66:y:2017:i:c:p:493-507 is not listed on IDEAS

    More about this item

    Keywords

    Copulas; Extreme dependence measures; Crude oil; Natural gas; VaR;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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