HIGH PRICE VOLATILITY AND SPILLOVER EFFECTS IN ENERGY MARKETS

We analyze time-varying volatility in crude oil, heating oil, and natural gas futuresmarkets by incorporating changes in important macroeconomic variables and majorpolitical and weather-related events in conditional variance equations. We allow eachmarket to respond to positive news different than to negative news by using theexponential GARCH model developed by Nelson (1991). It is shown that a leverageeffect exists in each market with a larger response to negative news. Further, volatility in these markets is found to change in response to several major events such as the Asian financial crisis in 1997 and hurricane Katrina in 2005, as well as in response to changes in macroeconomic variables such as consumer price and industrial production indices. Inaddition, downward changes in these macro variables are found to have larger impactthan upward changes do. Finally, volatility spillover from heating oil to natural gasfutures markets is found.