Interdependence between the oil and natural gas markets.

Abstract

In this master thesis we investigate, using daily returns, the existence of volatility spillovers between two commonly traded indices the NYSE Arca natural gas index (XNG) and the NYSE Arca oil index (XOI). We use semi-parametric (Cheung-Ng (1996) and Hong (2001)) and parametric techniques (BEKK-GARCH model). Our findings dictate that there is causality in variance for both indices. We expand our analysis scrutinizing the dynamics of a shock in variance using Volatility Impulse Response analysis as proposed by Hafner and Herwartz (2006). We implement our results to compose an optimal portfolio allocated between these two indices.