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Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management

Author

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  • Riadh Aloui
  • Mohamed Safouane Ben Aïssa
  • Shawkat Hammoudeh
  • Duc Khuong Nguyen

Abstract

In this article, we show how the copula-GARCH approach can be appro- priately used to investigate the conditional dependence structure between the crude oil and natural gas markets as well as to derive implications for port- folio risk management in extreme economic conditions. Using daily price data from January 1997 to October 2011, our in-sample results show evi- dence of asymmetric dependence between the two markets. The crude oil and gas markets tend to co-move closely together during bullish periods, but not at all during bearish periods. Moreover, taking the extreme comovement into account leads to an improvement in the accuracy of the out-of-sample Value-at-Risk forecasts.

Suggested Citation

  • Riadh Aloui & Mohamed Safouane Ben Aïssa & Shawkat Hammoudeh & Duc Khuong Nguyen, 2014. "Dependence and extreme dependence of crude oil and natural gas prices with applications to risk management," Working Papers 2014-590, Department of Research, Ipag Business School.
    • Handle: RePEc:ipg:wpaper:2014-590
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    More about this item

    Keywords

    Copulas; extreme dependence measures; crude oil; natural gas; VaR.;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q47 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy Forecasting

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