() and Paolo Zagaglia
Fabrizio Spargoli: Università Politecnica delle Marche, Postal: Università Politecnica delle Marche, Piazzale Martelli 8, 60121 Ancona, Italy
Paolo Zagaglia: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden, and European Central Bank
Abstract: This paper studies the comovements between the daily returns of forwards on natural gas traded in the NYMEX with maturity of 1, 2 and 3 months. We identify a structural multivariate BEKK model using a recursive assumption whereby shocks to the volatility of the returns are transmitted from the short to the long section of the forward curve. We find strong evidence of spillover effects both in the conditional first and second moments. In the conditional mean, we show that the transmission mechanism operates from the longer to the shorter maturity. In terms of reducedform conditional second moments, the shortest the maturity, the higher the volatility of the return, and the more the returns become independent from the others and follow the dynamics of the underlying commodity. The evidence from the structural second moments indicates that the longer the maturity is, the higher is the uncertainty about the returns. We also show that the higher the structural variance of a return relative to that of another return, the stronger the correlation is between the two.
21 pages, August 23, 2007
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