Information Spillover Dynamics of the Energy Futures Market Sector: A Novel Common Factor Approach

Abstract

We investigate sector level information spillovers from energy to other futures market sectors using a novel conditionally heteroscedastic common factor (CHCF). CHCF represents common trends of macroeconomic influences on futures markets. We find that energy sector has the highest degree of commonality compared to other sectors. Conditional correlations between energy and non-energy sectors are highly persistent. The volatility spillover from the energy sector is prominent compared with mean and extreme market risk spillovers. Extreme risk spillovers from the energy to other sectors have an asymmetric effect. Shocks to energy futures have a significant potential impact on other markets during crises.