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Interplay of multifractal dynamics between shadow policy rates and energy markets

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  • Aslam, Faheem
  • Hunjra, Ahmed Imran
  • Memon, Bilal Ahmed
  • Zhang, Mingda

Abstract

This study examines the interconnections between short shadow rates (SSR) and energy markets. We conduct multifractal detrended cross-correlation analysis (MF-DXA) on the daily SSR from four major economies (USA, Eurozone, Japan, and UK) and the daily prices of four energy markets (WTI, Brent, Natural Gas, and Heating Oil) spanning January 1995 to March 2022. Our analysis shows that all energy market-short shadow rate pairs display significant multifractal characteristics. The presence of power law cross-correlation suggests that substantial changes in short shadow rates are associated with significant price changes in energy markets. The highest multifractal cross-correlation is observed between energy prices and shadow short rates of Japan and the US. Energy markets demonstrate persistent cross-correlations for small fluctuations compared to large fluctuations. However, the rolling windows analysis reveal a shift from persistent to anti-persistence cross-correlations during global financial crises (GFC), the 2014–2016 energy crises and the COVID-19 pandemic. Lastly, the cross-correlation exhibit positive skewness. We suggest that integrating these long-term dependency features into financial analysis has the potential to support decision-making for market participants.

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  • Aslam, Faheem & Hunjra, Ahmed Imran & Memon, Bilal Ahmed & Zhang, Mingda, 2024. "Interplay of multifractal dynamics between shadow policy rates and energy markets," The North American Journal of Economics and Finance, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:ecofin:v:71:y:2024:i:c:s1062940824000093
    DOI: 10.1016/j.najef.2024.102085
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    Keywords

    Short Shadow Rates; Energy Prices; Monetary Policy; Cross Correlation Analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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