Leverage effect in energy futures

Ladislav Krištoufek ()

No 17, FinMaP-Working Papers from Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents

Abstract: We propose a comprehensive treatment of the leverage effect, i.e. the relationship between returns and volatility of a specific asset, focusing on energy commodities futures, namely Brent and WTI crude oils, natural gas and heating oil. After estimating the volatility process without assuming any specific form of its behavior, we find the volatility to be long-term dependent with the Hurst exponent on a verge of stationarity and non-stationarity. To overcome such complication, we utilize the detrended cross-correlation and the detrending moving-average cross-correlation coefficients and we find the standard leverage effect for both crude oils and heating oil. For natural gas, we find the inverse leverage effect. Additionally, we report that the strength of the leverage effects is scale-dependent. Finally, we also show that none of the effects between returns and volatility is detected as the long-term cross-correlated one. These findings can be further utilized to enhance forecasting models and mainly in the risk management and portfolio diversification.

Keywords: quadratic variation; realized variance; jumps; market microstructure noise; wavelets (search for similar items in EconPapers)
JEL-codes: C10 G10 Q40 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ene
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Related works:
Journal Article: Leverage effect in energy futures (2014)
Working Paper: Leverage effect in energy futures (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:fmpwps:17

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