Natural gas and the utility sector nexus in the U.S.: Quantile connectedness and portfolio implications

• Published in: Energy economics 2023-04, Vol.120, p.106632, Article 106632
• Main Authors: Pham, Son Duy, Nguyen, Thao Thac Thanh, Do, Hung Xuan
• Format: Article
• Language: English
• Subjects: Hedging benefit; Natural gas; Portfolio allocation; Quantile connectedness; Utility stocks
• ISSN: 0140-9883; 1873-6181
• DOI: 10.1016/j.eneco.2023.106632

Given that natural gas is a vital input for the U.S. utility sector, this study empirically investigates the return connectedness between the natural gas and utility stocks in the U.S. market. Using the quantile connectedness approach, we show that the nexus between natural gas and utility stocks is more pronounced at the tails compared to the central of the conditional distribution. The return connectedness indices are time-varying with a net receiver role of natural gas and driven by various macro-variables. Finally, our portfolio implication analyses with alternative tail risk measures suggest that it can be more beneficial for risk-adverse investors to allocate substantial weights into the electricity utility stocks in normal market conditions. However, during the COVID-19- induced recession, it is critical to shift more fund to the natural gas futures to reduce tail risks. •Nexus between natural gas and utility stocks is more pronounced at the tails.•Connectedness indices are time-varying with a net receiver role of natural gas.•They are more concentrated in the short-run, and driven by various macro-variables.•Our findings support the “wealth effect” channel of the relationship.•Important portfolio implications during normal and recession periods are delivered.