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Influence of Fluctuations in Fossil Fuel Commodities on Electricity Markets: Evidence from Spot and Futures Markets in Europe

Author

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  • Tiantian Liu

    (Graduate School of Economics, Kobe University, Kobe 657-8501, Japan)

  • Xie He

    (Graduate School of Economics, Kobe University, Kobe 657-8501, Japan)

  • Tadahiro Nakajima

    (Graduate School of Economics, Kobe University, Kobe 657-8501, Japan
    The Kansai Electric Power Company, Incorporated, Osaka 530-8270, Japan)

  • Shigeyuki Hamori

    (Graduate School of Economics, Kobe University, Kobe 657-8501, Japan)

Abstract

Using a fresh empirical approach to time-frequency domain frameworks, this study analyzes the return and volatility spillovers from fossil fuel markets (coal, natural gas, and crude oil) to electricity spot and futures markets in Europe. In the time domain, by an approach developed by Diebold and Yilmaz (2012) which can analyze the directional spillover effect across different markets, we find natural gas has the highest return spillover effect on electricity markets followed by coal and oil. We also find that return spillovers increase with the length of the delivery period of electricity futures. In the frequency domain, using the methodology proposed by Barunik and Krehlik (2018) that can decompose the spillover effect into different frequency bands, we find most of the return spillovers from fossil fuels to electricity are produced in the short term while most of the volatility spillovers are generated in the long term. Additionally, dynamic return spillovers have patterns corresponding to the use of natural gas for electricity generation, while volatility spillovers are sensitive to extreme financial events.

Suggested Citation

  • Tiantian Liu & Xie He & Tadahiro Nakajima & Shigeyuki Hamori, 2020. "Influence of Fluctuations in Fossil Fuel Commodities on Electricity Markets: Evidence from Spot and Futures Markets in Europe," Energies, MDPI, vol. 13(8), pages 1-20, April.
    • Handle: RePEc:gam:jeners:v:13:y:2020:i:8:p:1900-:d:345059
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    Cited by:

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    4. Naeem, Muhammad Abubakr & Arfaoui, Nadia, 2023. "Exploring downside risk dependence across energy markets: Electricity, conventional energy, carbon, and clean energy during episodes of market crises," Energy Economics, Elsevier, vol. 127(PB).
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    6. Guannan Wang & Juan Meng & Bin Mo, 2023. "Dynamic Volatility Spillover Effects and Portfolio Strategies among Crude Oil, Gold, and Chinese Electricity Companies," Mathematics, MDPI, vol. 11(4), pages 1-25, February.
    7. Ahmad, Wasim & Hernandez, Jose Arreola & Saini, Seema & Mishra, Ritesh Kumar, 2021. "The US equity sectors, implied volatilities, and COVID-19: What does the spillover analysis reveal?," Resources Policy, Elsevier, vol. 72(C).
    8. Tiantian Liu & Tadahiro Nakajima & Shigeyuki Hamori, 2022. "The impact of economic uncertainty caused by COVID-19 on renewable energy stocks," Empirical Economics, Springer, vol. 62(4), pages 1495-1515, April.
    9. Coskun, Merve & Taspinar, Nigar, 2022. "Volatility spillovers between Turkish energy stocks and fossil fuel energy commodities based on time and frequency domain approaches," Resources Policy, Elsevier, vol. 79(C).

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