Dependence Analysis for the Energy Sector Based on Energy ETFs

ABSTRACT

This study investigates the effects of crude oil and natural gas future returns on energy stock portfolios. We consider returns of portfolios of energy companies approximated by energy ETFs and returns of Brent crude oil and natural gas contracts listed on the US market from January 2015 to September 2022. To study the relationship between Brent crude oil, natural gas, and ETFs, we apply Granger causality in mean and variance, Dynamic Conditional Correlation and the tail dependence-focused copula approach. The research hypothesis regarding the dependence between energy ETFs and the underlying energy risk factors—crude oil and natural gas, and therefore, the existence of hedging or diversification opportunities, was verified. Our empirical findings indicate that crude oil has a medium effect on energy ETFs, and for natural gas it is even lower in the analyzed period, so hedging opportunities are weak, but opportunities for diversification arise.