Natural gas and the utility sector nexus in the US: Quantile connectedness and portfolio implications

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 COVID19- induced recession, it is critical to shift more fund to the natural gas futures to reduce tail risks.

Automated summary

This study investigates the relationship between natural gas and utility stocks in the U.S. market, finding that the connection is more pronounced at the tails of the distribution. The return connectedness indices are time-varying, with natural gas playing a net receiver role and influenced by various macro-variables. The research suggests that risk-adverse investors should allocate substantial weights to electricity utility stocks in normal market conditions, but during the COVID-19-induced recession, it is critical to shift more funds to natural gas futures to reduce tail risks.