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Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis

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  • Delphine Lautier
  • Franck Raynaud

Abstract

This article uses graph theory to provide novel evidence regarding market integration, a favorable condition for systemic risk to appear in. Relying on daily futures returns covering a 12-year period, we examine cross- and intermarket linkages, both within the commodity complex and between commodities and other financial assets. In such a high dimensional analysis, graph theory enables us to understand the dynamic behavior of our price system. We show that energy markets—as a whole—stand at the heart of this system. We also establish that crude oil is itself at the center of the energy complex. Further, we provide evidence that commodity markets have become more integrated over time. Keywords: Systemic risk, Energy, Derivative markets, High dimensional analysis, Graph theory, Minimum spanning trees

Suggested Citation

  • Delphine Lautier & Franck Raynaud, 2012. "Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis," The Energy Journal, , vol. 33(3), pages 215-240, July.
    • Handle: RePEc:sae:enejou:v:33:y:2012:i:3:p:215-240
    DOI: 10.5547/01956574.33.3.8
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    References listed on IDEAS

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    1. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
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