How does bad and good volatility spill over across petroleum markets?

TL;DR

This paper investigates how positive and negative volatility spill over across petroleum markets, revealing increased spillovers over time, especially after the 2008 crisis, with bad volatility having a larger spillover effect than good volatility.

Contribution

It quantifies asymmetries in volatility spillovers among petroleum commodities using realized semivariances and examines changes over a long period, highlighting the impact of financialization and the 2008 crisis.

Findings

Volatility spillovers increased from 1987 to 2014.

Bad volatility spills over more than good volatility.

Post-2008 crisis, asymmetries in spillovers declined.

Abstract

We detect and quantify asymmetries in volatility spillovers using the realized semivariances of petroleum commodities: crude oil, gasoline, and heating oil. During the 1987--2014 period we document increasing spillovers from volatility among petroleum commodities that substantially change after the 2008 financial crisis. The increase in volatility spillovers correlates with the progressive financialization of the commodities. In terms of asymmetries in spillovers we show that periods of increasing crude oil prices strongly correlate with dominating spillovers due to bad volatility. Overall, bad volatility due to negative returns spills over among petroleum commodities to a much larger extent than good volatility due to positive returns. After the 2008 financial crisis the asymmetries in spillovers markedly declined in terms of total as well as directional spillovers. An analysis of directional spillovers further reveals that no commodity dominates other commodities in terms of spillover transmission in general.