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Multivariate dependence and spillover effects across energy commodities and diversification potentials of carbon assets

Author

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  • Uddin, Gazi Salah
  • Hernandez, Jose Areola
  • Shahzad, Syed Jawad Hussain
  • Hedström, Axel

Abstract

In a first step, we model the multivariate tail dependence structure and spillover effects across energy commodities such as crude oil, natural gas, ethanol, heating oil, coal and gasoline using canonical vine (C-vine) copula and c-vine conditional Value-at-Risk (CoVaR). In the second step, we formulate portfolio strategies based on different performance measures to analyze the risk reduction and diversification potential of carbon assets for energy commodities. We identify greater exposure to losses arising from investments in heating oil and ethanol markets. We also find evidence of carbon asset providing diversification benefits to energy commodity investments. These findings motivate for regulatory adjustments in the trading and emission permits for the energy markets most strongly diversified by carbon assets.

Suggested Citation

  • Uddin, Gazi Salah & Hernandez, Jose Areola & Shahzad, Syed Jawad Hussain & Hedström, Axel, 2018. "Multivariate dependence and spillover effects across energy commodities and diversification potentials of carbon assets," Energy Economics, Elsevier, vol. 71(C), pages 35-46.
    • Handle: RePEc:eee:eneeco:v:71:y:2018:i:c:p:35-46
    DOI: 10.1016/j.eneco.2018.01.035
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    More about this item

    Keywords

    Carbon assets; Energy commodities; Tail dependence; Risk spillover;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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