Volatility and dependence in energy markets

We use a semiparametric GARCH-in-Mean copula model to examine the price evolution and volatility dynamics of crude oil, natural gas, and hydrocarbon gas liquids markets using data from January 2002 to December 2021. We find that uncertainty has a positive and statistically significant effect on the returns of crude oil and natural gas, but has a negative and statistically significant effect on ethane returns. We also find that the Frank copula is the best copula to describe the (bivariate) dependence structures between the crude oil, natural gas, and hydrocarbon gas liquids markets, except for the relationship between ethane and butane where the Clayton copula is the most fitted copula. It suggests that weak lower and upper tail dependence exists between the energy returns, and there is statistically significant lower tail dependence between ethane and butane. In other words, extremely low crude oil prices are associated with low prices of natural gas and hydrocarbon gas liquids, and vice versa. When ethane returns go down, there is excess comovement in the returns of butane. Moreover, the tail dependence is strongest between crude oil and natural gas.