Frequency Volatility Connectedness and Portfolio Hedging of U.S. Energy Commodities

We analyze (frequency) connectedness and portfolio hedging among U.S. energy commodities from 1997 to 2023. We show that total connectedness has a rising trend, suggesting that the financialization of the energy commodity market deepens its volatility connectedness. We find that the early stage of the Russia-Ukraine war and the Covid-19 pandemic are associated with the highest systemic risk in the energy commodity market, followed by the GFC. The results of directional volatility spillovers reveal that heating oil is the dominant asset as a volatility receiver and transmitter. In contrast, natural gas volatility is strongly affected by its own historical volatility. Considering frequency decomposition, the long-term component plays a major role, particularly during distress periods of the GFC, the Covid-19 pandemic, and the Russia-Ukraine war; the short-term component plays a minor role. Finally, adding natural gas into an energy portfolio brings diversification benefits due to the lowest hedging costs