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

Author

Listed:
  • Gazi Salah Uddin
  • Jose Areola Hernandez

    (Rennes SB - Rennes School of Business)

  • Syed Jawad Hussain Shahzad
  • Axel Hedström

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

  • Gazi Salah Uddin & Jose Areola Hernandez & Syed Jawad Hussain Shahzad & Axel Hedström, 2018. "Multivariate dependence and spillover effects across energy commodities and diversification potentials of carbon assets," Post-Print hal-01996386, HAL.
    • Handle: RePEc:hal:journl:hal-01996386
    DOI: 10.1016/j.eneco.2018.01.035
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    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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