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Understanding Dynamic Conditional Correlations between Oil, Natural Gas and Non-Energy Commodity Futures Markets

Abstract:
We look at the dynamic conditional correlations (DCCs) between oil, natural gas and other non-energy commodity futures markets, obtained from a DCC-GARCH model over the period 1998-2014. They are positive and display a sharp increase around year 2008 and a subsequent decrease. The DCCs between energy and metals are larger than the energy-agriculture ones. To understand how macroeconomic and financial factors, as well as speculative activity, influence them, we estimate an ARDL(1,1) model, adopting a pooled mean group (PMG) estimator. We observe that macroeconomic and financial variables are significantly correlated with the energy-agriculture and energy-metals DCCs. Speculative activity contributes to explain the energy-agriculture DCCs but not those of the energy-metals.

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Keywords: Multivariate GARCH, Dynamic conditional correlations, Pooled mean group, Commodity futures markets, Oil, Natural gas, Agriculture, Metals.

DOI: 10.5547/01956574.40.2.nbeh

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Published in Volume 40, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.