Co-movement of energy commodities revisited: Evidence from wavelet coherence analysis

Abstract

In this paper, we contribute to the literature on energy market co-movement by studying its dynamics in the time-frequency domain. The novelty of our approach lies in the application of wavelet tools to commodity market data. A major part of economic time series analysis is done in the time or frequency domain separately. Wavelet analysis combines these two fundamental approaches allowing study of the time series in the time-frequency domain. Using this framework, we propose a new, model-free way of estimating timevarying correlations. In the empirical analysis, we connect our approach to the dynamic conditional correlation approach of Engle (2002) on the main components of the energy sector. Namely, we use crude oil, gasoline, heating oil, and natural gas on a nearest-future basis over a period of approximately 16 and 1/2 years beginning on November 1, 1993 and ending on July 21, 2010. Using wavelet coherence, we uncover interesting dynamics of correlations between energy commodities in the time-frequency space.

Gold, oil, and stocks: Dynamic correlations

“…Gençay et al (2001) and Ramsey (2002) provide ample exposition on the use and versatility of wavelet techniques in economics and finance. During the past decade the methodology gained currency and relevant applications of wavelets include analyses of stocks (Fernandez, 2006(Fernandez, , 2008In and Kim, 2006;Rua and Nunes, 2009), commodities (Vacha and Barunik, 2012;Graham et al, 2013;Reboredo and Rivera-Castro, 2014a), exchange rates (Nekhili et al, 2002;Karuppiah and Los, 2005;Nikkinen et al, 2011), and other financial and economic variables or their interactions In, 2005, 2007;Faÿ et al, 2009;Rua, 2010;Aguiar-Conraria and Soares, 2011;Gallegati et al 2011;Aguiar-Conraria et al, 2012;Reboredo and Rivera-Castro, 2014b). By using wavelets we are able to test the hypothesis on the existence of homogeneity in dynamic correlations across various investment horizons among assets, an issue that so far has been largely overlooked in the literature.…”

Exploring the Dynamic Links between GCC Sukuk and Commodity Market Volatility

“…They conclude that gold can be considered a safe-haven asset. Vacha and Barunik (2012) and Delatte and Lopez (2013) show no relationship between equity and commodity market returns in the 1990s and during most of the 2000s, except for industrial metals. Silvennoinen and Thorp (2013) find that correlations between S&P 500 returns and common commodity returns increased in many cases over the 1990-2009 period and increased sharply in the wake of the recent global financial crisis.…”

Does a Held-to-Maturity Strategy Impede Effective Portfolio Diversification for Islamic Bond (Sukuk) Portfolios? A Multi-Scale Continuous Wavelet Correlation Analysis

“…see Vacha and Barunik (2012), Madaleno and Pinho (2012), Saiti (2012), among others). The CWT maps the original time series, which is a function of just one variable time-separate into function of two different variables such as time and frequency.…”