Fundamental and financial influences on the co-movement of oil and gas prices

Bunn, D W and Chevallier, J and Le Pen, Y and Sevi, B (2017) Fundamental and financial influences on the co-movement of oil and gas prices. Energy Journal, 38 (2). ISSN 0195-6574

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Abstract

As speculative flows into commodity futures are expected to link commodity prices more strongly to equity indices, we investigate whether this process also creates increased correlations amongst the commodities themselves. Considering U.S. oil and gas futures, we investigate whether common factors, derived from a large international data set of real and nominal macroeconomic variables by means of the large approximate factor models methodology, are able to explain both returns and whether, beyond these fundamental common factors, the residuals remain correlated. We further investigate a possible explanation for this residual correlation by using some proxies for trading intensity derived from CFTC publicly available data, showing most notably that the proxy for speculation in the oil market increases the oil-gas correlation. We thus identify the central role of financial activities in shaping the link between oil and gas returns.

Item Type: Article
Subjects: C > Commodity futures markets
S > Speculation
Subject Areas: Management Science and Operations
DOI: 10.5547/01956574.38.2.dbun
Date Deposited: 31 Oct 2016 16:47
Last Modified: 24 Jul 2017 11:21
URI: http://lbsresearch.london.edu/id/eprint/510

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