Resources Policy 85 (2023) 103792

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

The Russia–Ukraine war and energy market volatility: A novel application

of the volatility ratio in the context of natural gas
Shengming Chen a, Ahmed Bouteska b, *, Taimur Sharif c, Mohammad Zoynul Abedin d
a
School of Law, Xiamen University, Xiamen, 361005, China
b
Faculty of Economics and Management of Tunis, University of Tunis El Manar, Tunisia
c
School of Management and Economics, University of Kurdistan Hewlêr (UKH), 30 Meter Avenue, Erbil, Iraq
d
School of Management, Swansea University, Bay Campus, Fabian Way, Swansea, SA1 8EN, Wales, UK

A R T I C L E I N F O A B S T R A C T

JEL classification: The major aim of this paper is to analyze the influence of the recent Russia–Ukraine war on the volatility dy­
C58 namics of the natural gas market for the 1 June 2011–31 December 2022 period. Given the emergence of the S&P
G01 GSCI Natural Gas as the first most dominant energy natural gas market in the World, we use the daily return data
G10
of the S&P GSCI natural gas index for the empirical analysis. As a novel approach, we apply the Volatility Ratio, a
G14
contemporary technical statistic measure, to assess the behavior of the volatility-of-volatility at different time
Keywords:
horizons in the natural gas market. Empirical findings of this paper reveal that the volatility-of-volatility had
Russia–Ukraine war
Energy market
been rapidly dying down before the war, subsequently taking a longer time to die down in the S&P GSCI natural
Volatility ratio gas index. Further, the findings imply that periods of uncertainties trigger investors’ intent to make some best
Volatility-of-Volatility possible decisions and formulate superior strategies, without necessarily displaying any herding tendency of
Natural gas imitating their counterparts. Being the first study to apply the new volatility ratio analysis in accomplishing the
aim of this research, our findings lay an economic foundation for necessary policy formulation and interventions
to safeguard the energy market investors and counteract detrimental effects on society and economy at large, in
the wake of any future Black Swan events such as the Russia–Ukraine conflict and the COVID-19 pandemic.

1. Introduction
In the recent years, the world has witnessed two major “Black Swan”
events (Taleb, 2010), namely, the COVID-19 and the Russia-Ukraine
conflict. While the financial markets were in the process of healing the
wounds of the former, Russia invaded Ukraine on 24 February 2022,
launching Europe’s largest conflict since the WWII (Karkowska and
Urjasz, 2023; World Bank, 2023; Beraich et al., 2022). Russia accounts
for a bulk proportion of global commodity exports, mainly energy (i.e.,
oil, gas and coal), and also industrial metals and agricultural merchan­
dises (Bank of England, 2023). The country tops the list of global ex­
porters of fertilizers (World Bank, 2023) and the list of the major gas
suppliers to the EU. Russian supplies to the EU accounted for over 40%
of the latter’s total gas imports (Intercontinental Exchange, 2022) and
20% of the crude oil imports in 2020 (World Bank, 2022). Ukraine’s
importance stems from its strategic geo-political positioning between
Russia and Central Europe, and highly productive farming activities on
black soil (Choudhary et al., 2022). Both these countries had been the
key suppliers of wheat, accounting for approximately 20% and 10% of
the exports respectively (OECD, 2022). They produce about 20% of the
world’s natural gas exports and 11% of the oil (Fang and Shao, 2022).
Following more than two years of devastations caused by the pandemic,
Russia’s invasion of Ukraine sharply decelerated global economic ac­
tivities (Karkowska and Urjasz, 2023), resulting in abnormal hikes in
commodity prices, aggravating inflation to multidecade peaks, exacer­
bating supply chain strains, magnifying poverty, worsening policy un­
certainty and condensed fiscal support in shrinking financial
environments and amplifying financial market vulnerability, and so on
(United Nations, 2022; World Bank, 2023). As a consequence of the war,
it is projected that the global economic (real GDP) growth will see a drop
from 5.7% in 2020–21 to 3% in 2023–24 (World Bank, 2023), mirroring
the forecasts for the USA (1.5%), the Eurozone (1.1%), China (4.4%)
(Credit Suisse, 2023).
The war in Ukraine led to a surge in price instabilities across a wide

* Corresponding author.
E-mail addresses: chenshengming@stu.xmu.edu.cn (S. Chen), ahmedcbouteska@gmail.com (A. Bouteska), taimur.sharif@ukh.edu.krd (T. Sharif), m.z.abedin@
swansea.ac.uk (M.Z. Abedin).

https://doi.org/10.1016/j.resourpol.2023.103792
Received 10 March 2023; Received in revised form 3 June 2023; Accepted 6 June 2023
Available online 23 June 2023
0301-4207/© 2023 Elsevier Ltd. All rights reserved.
S. Chen et al.
range of energy-related commodities and disrupted global economic
activities, much more than what the world witnessed during the 1970s
oil shocks (World Bank, 2023). To date, interruptions in energy trading
and uncertainties with future supply have caused huge jumps in energy
prices (Bella et al., 2023). The conflict exerted momentous influence on
financial market fluctuations worldwide, mainly due to economic em­
bargoes and subsequent rises in inflation (Chen et al., 2023; Beraich
et al., 2022) as well as the non-operational Black Sea ports which used to
be the gateway of 90% grain exports of Ukraine (World Bank, 2023).
Following the invasion on 24 February 2022, world stock markets
recorded significant decreases (Izzeldin et al., 2023). For example, the
FTSE100 Index fell 5.06%, the CAC40 Index fell 4.84%, the DAX Index
fell 4.96%, the FTSE MIB Index fell 5.15%, and the MOEX Index fell
37.61%. Additionally, the S&P 500 index recorded its first correction,
falling by about 10% from its peak on January 3. Moreover, the Rus­
sia–Ukraine war negatively affected stock returns (Boungou and Yatié,
2022; Yousaf et al., 2022).
It is evident that the wide divergence in energy prices have posed
threats to causing vulnerabilities in the respective financial markets
(Commodity Markets Outlook, 2022). One such example is the prices of
natural gas, which swelled over H1 2022 (Avalos and Huang, 2022),
averaging a 420% higher than the same in the previous five years
(Commodity Markets Outlook, 2022). The continued fall in supply of gas
led to a projected drop in global output by 0.8% within two years (World
Bank, 2023). Given that the 2008 Black Swan event (i.e., GFC) mainly
had direct effects on the oil and gold markets, the gas-paddled impli­
cations have appeared to be the greatest since then (Beraich et al.,
2022). It is worth mentioning that natural gas is a vital category of clean
energy, being the cleanest-burning fossil fuel among its peers (Avalos
and Huang, 2022). It therefore plays a unique role in fostering and
fastening the speed of structural transformations of the supply side of
green and low-carbon energy (Chen et al., 2023; Liang et al., 2021;
Wang et al., 2022). Moreover, it supports clean industrial operations, e.
g., gas-run generators provide a vital dispatchable source of electricity,
requiring a nominal footprint of oil in electricity generation, in contrast
to what was seen in the 1970s (Avalos and Huang, 2022). The volatilities
in the financial markets have had a substantial spillover effect on the
continued proliferation of the natural gas market during the contem­
porary age of carbon neutrality and energy transition (Chen et al.,
2023). While Europe’s target to lessen its dependance on natural gas
towards accomplishing ‘net zero’ is a long-term process, natural gas
remains a much needed and irreplaceable component in the short run
(Intercontinental Exchange, 2022). In spite its global significance, price
volatility of natural gas during the Black Swan events has failed to draw
much attention of the scholars (Pastory and Munishi, 2022). It is
therefore vital to investigate the implications of the Russia-Ukraine
conflict through the lens of the functioning of financial and energy
markets (Ha et al., 2022), focusing on the natural gas market due to its
significance as outlined above. In this connection, we scrutinise the in­
fluence of the Russia–Ukraine war on S&P GSCI Natural Gas, i.e., known
to be a benchmark for investment performance in the natural gas market
(Powell et al., 2017).
Methodologically, this paper uses the daily return data of the S&P
GSCI natural gas index for the 1 June 2011–31 December 2022 period to
conduct an empirical analysis of the influence of the Russian military
operation in Ukraine on the S&P GSCI Natural Gas, the first most
dominant energy natural gas market in the World. As a novel approach,
this paper stretches beyond the ordinary approach of holding a
comparative analysis of the pre- and post-volatility levels of the episode
of concern to draw a conclusion on its ups and downs, by developing an
understanding of the existence of any structural change in the observed
volatilities. In this connection, while most previous studies have limited
their analytical approaches to already used measures and proxies of
volatility in the energy market, we make contributions to the extant
literature in at least three ways. First, we propose a new technical sta­
tistic measure called the Volatility Ratio to infer the behavior of the
2
Resources Policy 85 (2023) 103792
Volatility-of-Volatility at different horizons and, to the best of our
knowledge, this is the first study to employ the new volatility ratio
analysis in order to examine the dynamics of volatility and the possible
effects of the war on the natural gas market. Second, we test the
distributional relation amid volatility and the war using the new
volatility-of-volatility approach. Given that numerous academic in­
vestigations have focused on the mixture of distribution hypotheses
(Clark, 1973; Harris, 1986; Richardson and Smith, 1994), we reanalyze
the notion that unconditional circulations of long-term natural gas
returns display possible non-normality. Third, we attempt to explain
further the nexus between the war and natural gas stock returns by
examining the volatility movements in the short term during the pre-
and post-crisis times.
The major findings of this study reveal in particular that the
volatility-of-volatility does not die down or takes a very long time to do
so in the S&P GSCI natural gas index, implying that during the post-
wartime period, the volatility displays a wildly random occurrence.
Mandelbrot (2001) indicates that this effect does not disappear by
viewing the volatility structure using estimates that illustrate insignifi­
cant randomness. In contrast, in the pre-war stage, the
volatility-of-volatility shows a fast drop following the horizon. This
supports the evidence about the existence of a fundamental variation in
the structure of volatility in the natural gas energy market in the wake of
the Russia–Ukraine war worldwide. The limitation of this paper lies in
the fact that the war in consideration is still ongoing and the situation is
getting more complex due to the increasing involvements of countries in
the global geopolitics. We therefore intend to hold a follow up analysis
following the peaceful settlement of the conflict.
The remainder of this paper proceeds as follows. Section 2 presents a
review of literature associated with the impact of the crises on the en­
ergy markets. Section 3 discusses research method and introduces the
model and the simulation. Section 4 explains the data used for the
empirical evaluation. The discussion of the empirical findings is done in
Section 5. The concluding remarks, contributions and limitations of
research as well as recommendations for future research are presented in
Section 6.
2. Literature review
Stock price distribution and volatility are one of the vastly
researched areas in finance and investments (Bhowmik and Wang, 2020;
Yadav et al., 2023). Empirical investigations have shed light on the ways
occurrence of major Black Swan events causes volatility of energy prices
(Pastory and Munishi, 2022) as well as non-energy prices (Khalfaoui
et al., 2021; Mighri et al., 2022). Due to the empirical significance, we
attempt to develop an understanding of the behavior of volatility of the
natural gas energy market and the effect of the Russia–Ukraine war as a
crisis of different nature and economic catastrophe on the S&P GSCI
natural gas stock market. Although a great proportion of finance re­
searchers have focused on exploring the effects of the uncertainties on
financial markets and making due considerations of these effects in
making better decisions in applied contexts (Chen et al., 2023), majority
of them have concentrated predominantly on the 2008 GFC and the
COVID-19 experiences with the crude oil markets (Bouteska et al., 2023;
Kang and Ratti, 2013; Hong et al., 2022; Wang and Lee, 2022), and
shown comparatively less enthusiasm in the case of natural gas (Chen
et al., 2023; Ha et al., 2022). Hence, given this limitation to hold a
comprehensive literature review on our topic of research, we broaden
our review to literature on other Black Swan events and associated en­
ergy market volatilities in order to explore useful insights of the
empirical implications of crises in the global financial and energy
markets.
2.1. Market volatility during the 2008 GFC
Following the 2008 GFC, a number of economic researchers have
S. Chen et al.
used the term “financial contagion” to explain the volatility spillovers
amid financial markets (Beraich et al., 2022; Diebold and Yilmaz, 2009).
Among the pioneers, Diebold and Yilmaz (2012) used generalized vector
autoregression (VAR) to estimate volatility deferrals on the US markets
corresponding to stocks, bonds, currencies and commodities. The au­
thors observed comparatively limited market volatilities prior to the
GFC and colossal variations in market volatilities and volatility spill­
overs amid markets during the GFC. Following Diebold and Yilmaz’s
(DY) methodology, Belcaid and AhmedGhini (2019) used the MASI, S&P
500, FTSE 100, CAC 40 and DAX 30 indices as the proxies for the stock
markets of Morocco, the US, the UK, France and Germany respectively to
assess the return and volatility spillovers between markets in the pre-
and post- GFC periods. The authors suggested a varying degree of
financial inter-relationship of the Moroccan stock markets with those of
the aforementioned countries from the developed world. Moreover, they
reported substantial negative impact on the stock markets in the US and
the EU while these markets witnessed a significant rise in the spillover
index immediately after the GFC period. Earlier, Ye et al. (2014) used
the distributional event response model (DERM) to assess the volatility
of oil price during the US invasion of Iraq in 2003 and the GFC in 2008,
and observed a noteworthy upsurge in the volatility. With reference to
the experience of the top three Asian oil-importing countries, i.e., China,
Japan and India, Sarwar et al. (2019) revealed that “shocks dependence
and conditional volatility in its own market have more important role
than volatility spillover” (p. 480), and suggested for more dependence
on stocks than oil assets while forming a more risk-averse portfolio of
investments.
2.2. Market volatility during the pandemic
As a global health catastrophe, the COVID-19 has seriously damaged
the energy industry and the global economy at large (Chakraborty and
Maity, 2020; Ha et al., 2022). Recent research papers have revealed that
the magnitude of the loss, especially on the stock and energy markets,
that the pandemic brought to the global economies was more than those
created by other environmental and manmade crises, ranging from
natural disasters to nuclear wars (Goodell, 2020; Zhang and Hamori,
2021). In particular, Baker et al. (2020) argued that the impacts of the
pandemic on the global stock markets and oil prices were more severe
than the outcomes of any prior outbreak of infectious disease. In the US,
the circuit breaker mechanism had to be activated four times in 10 days
in March 2020 in the US stock markets, and this has happened first time
in two decades (CNBC, 2020). Beraich et al. (2021) applied GARCH
models to investigate the effects of the COVID-19 on the volatility of the
financial market (proxied by MASI stock index) in Morocco and
observed a rise in the volatility of the market during the pandemic.
Beraich and El Main (2022) applied the DY method to create a volatility
spillover index and, based on the daily stock prices of the financial es­
tablishments in Morocco, they noted a growth in the index. Moreover,
they noticed varying degrees of spillover interrelationships amid six
publicly traded banks and the sectoral stock index in pre- and
post-pandemic periods in Morocco. Based on a comparative evaluation
of oil price volatility during the 2008 GFC, the SARS-COV and the
COVID-19, Kumail et al. (2021) observed a more volatile behaviour of
oil prices during the pandemic and it was due to the intensity of the
crisis. Hoang et al. (2021) noted a dramatic fall in the nuclear power
plant-based energy production in the EU and the US in Q1 of 2020,
caused by a plummeting demand worldwide. They reported a 2% fall in
natural gas demand during the same period of time while China, the EU,
and the US saw the highest amount of drops. In a similar fashion, Ha
et al. (2022) and Ha and Nham (2022) reported high volatility of the
energy sector during the ongoing health shocks of the pandemic.
“The pandemic resulted in unprecedented news coverage and
outpouring of opinions in this age of swift propagation of information
that made energy and financial market participants particularly sensi­
tive to coronavirus related news” (Haroon and Rizvi, 2020, as quoted in
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Resources Policy 85 (2023) 103792
Díaz et al., 2022, p.3), e.g., tolls of confirmed cases, deaths and re­
coveries (Baek et al., 2020). A number of studies investigated how the
COVID-19 news affected both stock returns and oil prices and indicated
how horrible panic caused by media fueled rising volatility in the
financial markets. For instance, Baek et al. (2020) applied machine
learning (ML) feature selection methodologies and revealed that energy
and financial stock market volatility had been sensitive to both bad and
good COVID-19 crisis news, causing a high rise in total and idiosyncratic
risk across all industries in the US. While bad and good COVID-19 crisis
figures are both vital in nature, the negative news has had more influ­
ence on the economic variables (Salisu and Vinh Vo, 2020). Al-Maadid
et al. (2022) also utilized ML approaches and spotted strong influence of
COVID-19-related crisis news on the stock and energy markets in the
GCC (Gulf) countries, e.g., the KSA (Saudi Arabia), Qatar, the Sultanate
(Oman) and the UAE. In contradiction to the findings of the previous
studies that suggested negative influence of the COVID-19 on the
developed country stock markets, Waheed et al. (2020) referred to the
experience of the Pakistani stock market (KSE-100 index) and pin­
pointed how a timely government intervention in crisis can safeguard
investor and ensure a positive growth in returns.
2.3. Market volatility during geopolitical conflicts
Many contemporary subject specialists have inspected the nexus
between geopolitical uncertainty and energy returns whereas only a few
of them have concentrated on exploring the effects of geopolitical risk on
the energy market volatility (Ha et al., 2022). Wang and Yang (2018)
pinpointed the contribution of geopolitical risks to oil price volatility
and emphasised that the sensitivity of the volatility was more prone to
shale production shocks than to geopolitical hazards. Liu et al. (2019)
used the GARCH-mixed data sampling (MIDAS) model to scrutinise the
relationship between geopolitical uncertainty and the volatility of oil
markets, and suggested a more fluctuating oil market in the wake of
geopolitical uncertainty. Demirer et al. (2019) highlighted the signifi­
cance of the geopolitical hazards in predicting volatility in the oil
market. Mei et al. (2020) applied the MIDAS model to investigate the
nexus between geopolitical risk and oil realized volatility, and suggested
a positive correlation. Lo et al. (2022) studied a huge panel of 73
economies, and observed a rise in volatility and a fall in the financial
market asset returns as a consequence of the war. The authors further
suggested that the military conflict negatively influenced the stock
markets in Ukraine and surged volatility irrespective of the level of
Ukraine’s reliance on the commodities from Russia.
2.4. Long memory discourse in financial and energy markets
A vast body of literature claimed that occurrence of volatility dis­
plays long memory (Andersen et al., 2003; Baillie et al., 1996, 2019;
Breidt et al., 1998; Comte and Renault, 1998; Choi et al., 2010; Ding and
Granger, 1996; Fleming and Kirby, 2011; Goldman et al., 2013; Perron
and Shi, 2020; Qiu et al., 2019; Robinson, 1991, 2001). Many other
investigations however indicated that a detected long memory may not
be created only by linearly fragmented amalgamation process but also
by cross-sectional accumulation of short memory stationary series
(Granger and Ding, 1996); assortment of the arrivals of various het­
erogeneous short-run information (Andersen and Bollerslav, 1997);
non-linear models, such as structural breaks (changes) or regime
switches (Granger and Hyung, 2004; Choi and Zivot, 2007; Diebold and
Inoue, 2001). Another group of studies substantiated the indications of
long memory in the stock markets (Nath, 2001; Verma, 2008; Goudarzi,
2010; Mishra et al., 2011). For instance, Lo and MacKinlay (1988)
applied the ratio of the variance of k-week stock returns to k times the
variance of one week stock returns and suggested that the ratio rises
above 1 for small values of k (2≤ k ≤ 32). Andersen et al. (2003)
employed a fractional autoregressive model to interpret the long mem­
ory structure of realized volatility and noted these forecasts are better
S. Chen et al.
compared with those produced by well-admired models of volatility, e.
g., daily GARCH, RiskMetrics, and FIEGARCH. However, spikes in
realized volatility and nonlinearities in the dynamics are not integrated
in these modeling. As an approximation to a long memory ARFIMA
process, a group of researchers (e.g., Andersen et al., 2007;Liu and
Maheu, 2008; McAleer and Medeiros, 2008) used a heterogeneous
autoregressive model (HAR) to model time series with long memory at
its commencement. Since volatility exhibits long memory, ARFIMA is
emerging as a well-liked tool for modeling volatility. Kumar and
Maheswaran (2013) employed Monte Carlo simulations and verified the
small sample qualities of three methods, namely R/S, R/S – AL and the
detrending MA approaches in assessing long range dependence mea­
sures, and confirmed the existence of long-range dependence in the
stock market.
It is evident that extant studies have largely focused on the nexus
between the post-Millennium Black Swan events and corresponding
volatility in energy markets, oil in particular, and overshadowed the
importance of exploring the relationship between Russia-Ukraine con­
flict and volatility of natural gas markets. In light of this backdrop, we
aim to empirically examine the effect of the aforementioned conflict on
the volatility behavior of the benchmark energy market of S&P GSCI
natural gas. Also, given that extant literature employed a variety of
methods to document long memory in the financial and energy markets,
we add further to it by analyzing it from a novel standpoint in the
context of the S&P GSCI natural gas.
3. Data and methodology
This paper explores the impact of the Russia-Ukraine conflict on the
natural gas market volatility using S&P GSCI Natural Gas as a bench­
mark index, and accordingly develops an understanding of the existence
of any structural change in the observed volatilities. As a novel
approach, we propose a new technical statistic measure, namely Vola­
tility Ratio, to infer the behavior of the Volatility-of-Volatility at
different horizons. Our methodological review implies that this study
pioneers employing the new volatility ratio analysis to examine the
dynamics of volatility and the possible effects of the war on the natural
gas market. Further, given that numerous academic investigations have
focused on the Mixture of Distribution Hypothesis (MDH) (Clark, 1973;
Harris, 1986; Le Fol, 2017; Richardson and Smith, 1994), we reanalyze
the notion that unconditional circulations of long-term natural gas
returns display possible non-normality and therefore test the distribu­
tional relation amid volatility and the war using the
volatility-of-volatility approach. We examine the volatility movements
in the short term during the pre- and post-crisis times to further explain
the nexus between the war and natural gas stock returns. Altogether, we
have remained cautious of not limiting our analytical approach to con­
ventional measures and proxies of volatility in the energy market, e.g.,
holding a comparative analysis of the pre- and post-volatility levels of
the Black Swan events of concern to draw a conclusion on its ups and
downs in the energy market, predominantly oil.
3.1. Data
We use the daily log returns as the key variable for the empirical
analysis of this research. To analyze the influence of the Russia–Ukraine
war on the degree of volatility in the energy natural gas market, we have
collected the 1 June 2011–31 December 2022 dataset of the closing
prices for S&P GSCI Natural Gas index from us.spindices.com. We split
the data into two major periods: (1) 1 June 2011–30 November 2019,
and (2) 24 February 2022–31 December 2022. We also omitted data for
period of the COVID-19 using 1 December 2019 and 23 February 2022
as the breakpoints. The first breakpoint (1 December 2019) represents
the date when the COVID-19 broke out in the Chinese Province of Hubei,
spreading eventually to 212 countries and recording the US and the EU
among the most affected regions. The second breakpoint (23 May 2022)
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Resources Policy 85 (2023) 103792
represents the date before the wartime impact of the Russia–Ukraine on
financial and energy markets. To examine the robustness of our empir­
ical results for post-war (i.e., period 2), we adopt a legitimate reason of
data cleaning and consistently delete any data points outside of the
range by removing the outlier/extreme values. In concurrence with the
works of Lo and MacKinlay (1988), Nath (2001), and Maheswaran et al.
(2011), the data are analyzed over k day moving windows, such as when
k = 1, the basic series is used as it is and composed of daily natural gas
returns. When k = 2, observations 1 & 2, 2 & 3, 3 & 4 …. are included to
form a novel series of k day natural gas returns. On the basis of this
series, we compute the Volatility Ratio and Volatility-of-Volatility (see
section 3.2) for each k, spanning 1–20. This k-day analysis is carried out
distinctly for the full sample period, comprising period (1): June
2011–November 2019, and period (2): 24 February 2022–31 December
2022. A sample period (2)’ is also considered after removing outliers
(beyond mean ± 3 standard deviations) from the 24 February 2022–31
December 2022 data to verify the robustness of the analysis.
3.2. Technical statistic measures
We consider two technical statistic measures, namely Volatility Ratio
and Volatility-of-Volatility, as proposed by Cochrane (1988) and applied
by MacDonald and Power (1992), Barman and Madhusoodanan (1993),
Madhusoodanan (1998), Nath (2001), Le et al. (2023), among few
others. However, given that the unconditional distribution of the energy
stock returns follows a combination of normal distributions, we follow
the context of the MDH (Clark, 1973) to develop an appealing expla­
nation on the possible nexus of the volume of trading with volatility of
returns (Le Fol, 2017). We therefore employ the MDH in order to obtain
the technical statistic measure, i.e., Volatility Ratio, and accordingly
define the stock return Xt as follows:
Xt = Zt √Yt
where, Xt = Ln(Pt ) − Ln(Pt− 1 ) at the close of day t and t-1, respectively.
Yt denotes stochastic variance for day t, i.e.,the variance of natural gas
returns series, and Zt is the standard normal variable,i.e., the stan­
dardized natural gas returns, often written as Z and it is the number of
standard deviations (SD) above or below the mean. For the derivations
of variables Zt and Yt , we applied the procedures followed by Siegel
(2012) and Shaik and Maheswaran (2019). The conversion is however
done as: Zt = (Xt − Mean(X)) /Standarddeviation. The MDH suggests
that unconditionally, the returns on stock follow a mixture of normal
distributions. It implies:
Conditionally,
Xt |Yt ∼ N(0, Yt )
Unconditionally, Xt = Zt √Yt , where Xt follows mixture of normal
distributions.
On normalizing,
[ 2⃒ ]
E Xt ⃒Yt = Yt
Unconditionally,
[ 2]
E Xt = E[Yt ] = 1
√̅̅̅̅̅
Assume, Var[Xt ] = E[Xt2 ].Then, E[|Xt ‖Yt ] = 2φ(0) Yt .
√̅̅̅̅̅
Unconditionally, E[|Xt |] = 2φ(0)E Yt .
Thus, VolatilityRatio is defined as follows:
[√̅̅̅̅]
E Yt
VolatilityRatio = √̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
Var(Xt )
E[|Xt |
=[ √̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
2φ(0) Var(Xt )]
S. Chen et al. Resources Policy 85 (2023) 103792

[√̅̅̅̅]
= E Yt Volatility = 0), and in this way, the non-stochastic nature of volatility is
confirmed.Volatility Ratio is used by investors and traders to detect
Now, pattern in the energy natural gas stock market. A volatility ratio which
{ [√̅̅̅̅]}2 equals to 1 indicates that there is no trend in volatility. This ratio is used
1 − (VolatilityRatio)2 = 1 − E Yt to test whether there is a trend in volatility, i.e., if this is more than 1
then there is an increasing volatility. If the Volatility ratio equals 1, then
it instinctively implies that the natural gas stock price formation expe­
= E[Yt ] − {E[Yt ]}2
riences random walk movement that tends to make the energy stock
[√̅̅̅̅̅̅] { [√̅̅̅̅]}2 [√̅̅̅̅] indices efficient. The Volatility ratio will be more than 1 when the stock
=E Yt 2 − E Yt = Var Yt price movement has an excess volatility scenario.
At this stage, we adopt the double exponential distribution to
√̅̅̅̅̅
where, Yt denotes stochastic volatility for day t, and Var[ Yt ] is the simulate the above econometric model. Linden (2001) proposed and
change (variation) of volatility for day t. demonstrated a double exponential distribution containing two factors,
√̅̅̅̅̅̅̅̅(√̅̅̅̅) i.e., natural gas stock returns expectation and variance, and emphasised
Volatility − of − Volatility = Var Yt this as an excellent and suitable form for daily and weekly observations.
A time series Xi∗ showing the extent of natural gas price variations is
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
provided in the following manner,
= 1 − (VolatilityRatio)2
[ ]
Obviously, the degree to which Volatility Ratio is lower than unity Xi∗ ∼ EXP(√2) ivariesfrom 1 ton = 105
value (1) shows that the existence of a movement away from normality.
In addition, we generate Di indicating the direction or sign of the natural
Likewise, when the other statistic, i.e., Volatility-of-Volatility, seems to
gas stock price variations ( ± 1) such that is independent and identical in
be significantly greater than 0 value, it shows that the volatility of en­
distribution for the probability of either sign being half and half. We
ergy natural gas stock returns is stochastic in the framework of the MDH.
defineXi as Xi = Di Xi∗ then, Xi ∼ DEXP(√2). This series of Xi is consid­
ered as input for the analysis.Table 1 highlights the VolatilityRatio and
3.3. Econometric modelling and simulation Volatility − of − Volatility for k day spanning 1–20.
We conclude based on Table 1 and Fig. 1 that Volatility − of −
Prior to the propositions of the regression model, simulation method Volatility as a function of k-day drops asymptotically to 0. This indicates
and related hypotheses, we reiterate our consideration of volatility ratio that VolatilityRatio come closer to 1 when k day turns large and that the
as one of the most important risk metrics to assess volatility in energy deviation from normality does die down over a specific time period, as
asset returns especially in times of the Russia–Ukraine war crisis period predicted with precision by the pioneering work of Clark (1973) on the
in natural gas market and global energy stock markets. We specify and implication of the Mixture of Distribution Hypothesis (MDH) in finance.
apply the following regression model to create the series of k-day natural
gas returns: 4. Empirical results

St (k) = Xt + Xt− 1 + … + Xt− k+1

In accomplishment of the major aim of analysing the influence of the
recent Russia–Ukraine war on the volatility dynamics of the natural gas
Where, Xt denotes the daily log return, t represents the impact number of
market for the 1 June 2011–31 December 2022 period, we apply the
days, and k is the number of observations to be tallied on a rolling
Volatility Ratio and present the empirical outcomes of the assessment of
window basis in order to effectively capture the dynamic contributions
the behavior of the volatility-of-volatility at different time horizons in
of volatility to St .
In short,
Table 1
∑k− 1
St (k) = Xt− j Simulation output (k day VolatilityRatio and Volatility − of − Volatility of vari­
able Xi that follows double exponential distribution).
0

The series is then standardized employing the following formula: K Volatility Ratio Volatility-of-Volatility

St (k)∗ = (St (k) − μ∗ ) / σ∗ 1 0.8862 0.4651

2 0.9407 0.3416
Where, μ∗ , and σ∗ are the mean and standard deviation of the sample 3 0.9606 0.2804
4 0.9710 0.2423
St (k), respectively.
5 0.9778 0.2131
VolatilityRatio = E(|St (k)∗ |) / 2φ(0) 6 0.9831 0.1867
7 0.9863 0.1691
√̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅ 8 0.9886 0.1553
Volatility − of − Volatility = 1 − (VolatilityRatio)2 9 0.9899 0.1465
10 0.9912 0.1371
We investigate whether (or not) Volatility Ratio is equal to 1 and 11 0.9926 0.1269
12 0.9938 0.1169
hence find out any possible deviation from normality. Specifically, the
13 0.9949 0.1073
existence and clear work of the MDH, i.e., indicative of the distribution 14 0.9955 0.1017
of natural gas returns as a blend of normal, is captured by rejecting 15 0.9960 0.0959
Volatility Ratio = 1. Hence, the research hypothesis arising from this 16 0.9970 0.0848
scenario is proposed as below: 17 0.9977 0.0763
18 0.9982 0.0693
H0 : Volatility Ratio = 1 19 0.9981 0.0707
20 0.9981 0.0719

H1 : Volatility Ratio ∕
=1 Note: This table presents the output of simulation, the variable (xi) that follows
double exponential distribution is considered as input, k is the width of k day
We note that if Volatility Ratio is equal to one (Volatility Ratio = 1), this window, and Volatility Ratio and Volatility-of-Volatility are listed for each k
indicates Volatility-of-Volatility is equal to zero (Volatility − of − day.

5
S. Chen et al. Resources Policy 85 (2023) 103792

Table 3
The k day Volatility Ratio of natural gas returns during the full sample period
(June 2011–December 2022).
K Day Actual Boot Mean Boot Standard Error W.R.T 1 P-Value

1 0.8856 0.8866 0.0112–10.9275 0.0000

2 0.9064 0.9293 0.0108–9.3636 0.0000
3 0.9177 0.9467 0.0107 − 8.2765 0.0000
4 0.9299 0.9572 0.0104 − 7.3169 0.0000
5 0.9334 0.9645 0.0104 − 6.9764 0.0000
6 0.9390 0.9691 0.0103 − 6.4213 0.0000
7 0.9426 0.9726 0.0107 − 5.8184 0.0000
8 0.9441 0.9760 0.0107 − 5.6902 0.0000
9 0.9479 0.9793 0.0103 − 5.5130 0.0000
Fig. 1. Evolution of the Volatility-of-Volatility measure, k day 1–20. Note: This
10 0.9516 0.9805 0.0107 − 4.9635 0.0000
figure shows the Volatility-of-Volatility measure of variable (xi) which follows
11 0.9556 0.9821 0.0110 − 4.4220 0.0000
double exponential distribution based on simulation for each K day 1–20. 12 0.9563 0.9840 0.0111 − 4.3192 0.0000
13 0.9590 0.9856 0.0112 − 3.9362 0.0002
the natural gas market. 14 0.9583 0.9866 0.0115 − 3.8818 0.0002
15 0.9583 0.9875 0.0116 − 3.8679 0.0002
Table 2 presents the descriptive statistics of the S&P GSCI variable.
16 0.9586 0.9881 0.0118 − 3.7662 0.0003
The average and median values depict the dissimilarity, denote data 17 0.9599 0.9888 0.0119 − 3.6218 0.0004
variation and unbalancing in the variable. Also, the mean value is 18 0.9608 0.9899 0.0127 − 3.3078 0.0011
positively depicting the progressiveness of the variable. The maximum 19 0.9603 0.9907 0.0128 − 3.3212 0.0010
20 0.9615 0.9911 0.0127 − 3.2380 0.0013
and minimum of variable present the range of the data in the table. The
range of the study variable is also positive but there is a significant Note: This table presents the k day Volatility Ratio of natural gas stock returns for
difference in the range values which shows the inconsistency of the the full sample period (June 2011 to December 2022). Boot Mean denotes the
values around the average value. The standard deviation statistics mean of Volatility Ratio calculated from bootstrap samples generated with
denote the fluctuation and volatility of the variable. S&P GSCI is highly MATLAB for each k day, the values in column 4 represent the Bootstrap standard
volatile because of the uncertain times such as the Russia-Ukraine war. errors of the estimators, and the values in columns 5 and 6 indicate the t-sta­
tistics with respect to one and p-values, respectively.
The skewness and Kurtosis values demonstrate the tail of the distribu­
tion and normality analysis. According to the Skewness test S&P GSCI is
positively skewed. The Kurtosis analysis shows that the variable is non Table 4
normally distributed because the statistics is greater than 3, as shown in The k day Volatility Ratio of natural gas returns during the sample period (1)
the Table below. Jarque Bera and probability analysis confirmed the (June 2011–November 2019).
non-normality and irregularity of the data. The probability stats of S&P
K Day Actual Boot Mean Boot Standard Error W.R.T 1 P-Value
GSCI is less than 1% rejecting the null hypothesis of normality distri­
1 0.9084 0.9093 0.0109–9.9729 0.0000
bution. The asymmetric distribution is validated from the probability
2 0.9279 0.9439 0.0106–7.3882 0.0000
statistics. 3 0.9428 0.9589 0.0105 − 5.9194 0.0000
The findings of the empirical experiment are summarized in 4 0.9564 0.9680 0.0105 − 4.5866 0.0000
Tables 3–7. Tables 3–6 present 6 columns that display width of k day 5 0.9592 0.9745 0.0103 − 4.3716 0.0000
window, the current Volatility Ratio, bootstrap mean and bootstrap 6 0.9623 0.9785 0.0109 − 3.8102 0.0003
7 0.9662 0.9812 0.0108 − 3.4610 0.0009
standard error (SE) of Volatility Ratio, and t-statistic considering one
8 0.9691 0.9841 0.0112 − 2.9963 0.0029
and p-value. The main use of bootstrapping procedure is to create reli­ 9 0.9771 0.9856 0.0116 − 2.2313 0.0346
able SE using the finite sample distribution of the test statistics. Table 7 10 0.9823 0.9880 0.0122 − 1.6723 0.1265
provides Volatility-of-Volatility that is the output of the Volatility Ratio 11 0.9867 0.9893 0.0122 − 1.3056 0.2387
12 0.9901 0.9907 0.0122 − 0.9166 0.3754
of each sample period investigated for the study.
13 0.9956 0.9921 0.0125 − 0.4324 0.6837
In testing the hypothesis (3.3 Econometric modelling and simula­ 14 0.9969 0.9924 0.0133 − 0.3016 0.7816
tion), we performed t-tests, with the size of the test being a = 5% to be a 15 0.9963 0.9930 0.0131 − 0.3546 0.7406
good estimator of the true variance. Table 3 shows that for the full 16 0.9975 0.9944 0.0137 − 0.2459 0.8245
sample period, the Volatility Ratio rises when k day moves from 1 to 20 17 0.9989 0.9956 0.0135 − 0.1275 0.9174
18 0.9998 0.9960 0.0146 − 0.0504 0.9750
where the t-stat is significant for all k day, implying that the Volatility
19 0.9990 0.9971 0.0142 − 0.1152 0.9272
Ratio is absolutely not equal to 1. In contrast, the Volatility Ratio stays 20 0.9998 0.9965 0.0146 − 0.0491 0.9756
less than one. Thus, we have to reject the proposed hypothesis
Note: This table presents the k day Volatility Ratio of natural gas stock returns for
(VolatilityRatio = 1) for the full sample period.
the sample period (1) (June 2011 to November 2019). Boot Mean denotes the
The t-test employed for a sample period (1) (June 2011–November
mean of Volatility Ratio calculated from bootstrap samples generated with
2019) give more noteworthy observations. In Table 4, we observe that MATLAB for each k day, the values in column 4 represent the Bootstrap standard
errors of the estimators, and the values in columns 5 and 6 indicate the t-sta­
Table 2 tistics with respect to one and p-values, respectively.
Descriptive statistics.
Measures S&P GSCI the t-statistics is shown to be insignificant, when the k day ≥ 10, indi­
cating that the inferred hypothesis (Volatility Ratio = 1) should not be
Mean 19.85397
Median 12.72000
declined at the 5% level of significance. We also clearly notice that the
Maximum 82.47000 Volatility-of-Volatility is approximately 0 for all k day ≥ 10. This result
Minimum 3.470000 highlights that over the pre-war phase of Russia–Ukraine (before the
Std. Dev. 15.60056 Russia–Ukraine war up till November 2019), the volatility of the long-
Skewness 1.354054
term return of the natural gas market has not been stochastic. Specif­
Kurtosis 4.636735
Jarque-Bera 1218.636 ically, when the k day rises, the natural gas stock returns have a trend
Probability 0.000000 that follows the normal distribution with a constant variance. It can only

6
S. Chen et al. Resources Policy 85 (2023) 103792

be understood by having a close observation of Table 6 that highlights a Table 6

fast fall of Volatility-of-Volatility. Based on such interesting findings, we The k day Volatility Ratio of natural gas returns during the sample period (2)’
argue that the pre-war sample period (1) had been a golden period for (February 24, 2022–December 2022 after removing outliers, i.e., mean ± 3
investing in the S&P GSCI Natural Gas market. standard deviations).
We then perform t-test on sample period (2) (24 February 2022–31 K Day Actual Boot Mean Boot Standard Error W.R.T 1 P-Value
December 2022). Expectedly, the results of Table 5 show that Volatility 1 0.8792 0.8822 0.0344 − 3.6060 0.0004
Ratio is significantly lower compared to one and thus Volatility-of- 2 0.9053 0.9240 0.0330 − 2.9522 0.0039
Volatility keeps positively by sign suggesting that the volatility of 3 0.9202 0.9383 0.0313 − 2.6301 0.0094
long-term natural gas return is stochastic in this post-war phase of 4 0.9365 0.9470 0.0311 − 2.1121 0.0362
5 0.9338 0.9538 0.0297 2.3030 0.0225
Russia–Ukraine war (after the recent ongoing crisis resulting from the
−
6 0.9437 0.9592 0.0291 − 2.0061 0.0466
continuing Russia–Ukraine war up till December 2022). 7 0.9426 0.9639 0.0294 − 2.0218 0.0449
In Fig. 2, we capture the variances in the volatility behavior of the 8 0.9386 0.9663 0.0290 − 2.1941 0.0296
natural gas market during the preceding and following periods of the 9 0.9347 0.9692 0.0280 − 2.4162 0.0167
10 0.9314 0.9720 0.0276 2.5750 0.0109
continuing Russia–Ukraine war. As we compare the results in Tables 4 −
11 0.9280 0.9743 0.0271 − 2.7504 0.0067
and 5, we can notice that prior to the Russia–Ukraine war time crisis the 12 0.9249 0.9755 0.0274 − 2.8381 0.0053
longer term natural gas returns undergone non-stochastic volatility 13 0.9198 0.9791 0.0277 − 2.9912 0.0035
while the volatility does not die down and is persistent following the 14 0.9193 0.9801 0.0261 − 3.2015 0.0020
Russia–Ukraine war time crisis. 15 0.9215 0.9823 0.0259 − 3.1415 0.0023
16 0.9192 0.9826 0.0262 3.1944 0.0021
To verify the robustness of the outcomes of this research we apply a
−
17 0.9194 0.9849 0.0271 − 3.0748 0.0028
robust t-test estimation. Given that the presence of outliers may affect 18 0.9229 0.9851 0.0280 − 2.8461 0.0052
the t-test results in the post-war period, we use the t-test for the sample 19 0.9258 0.9868 0.0270 − 2.8401 0.0053
period (2) in a follow-up analysis when it is less sensitive to outliers. In 20 0.9306 0.9883 0.0259 − 2.7773 0.0063
Table 6, the t-test for the sample period (2)’ (excluding the outliers) Note: This table presents the k day Volatility Ratio of natural gas stock returns for
highlights findings resembling to that of sample period (2). The findings the sample period (2)’ (February 24, 2022–December 2022 after removing
are in concurrence with the outcomes of the t-tests, as displayed in outliers, i.e., mean ± 3 standard deviations). Boot Mean denotes the mean of
Table 5. It implies that the proposed hypothesis (Volatility Ratio = 1) Volatility Ratio calculated from bootstrap samples generated with MATLAB for
can be declined as well at the 5% level of significance for this sample each k day, the values in column 4 represent the Bootstrap standard errors of the
period (2)’ without the outlier/extreme values. In line with the major estimators, and the values in columns 5 and 6 indicate the t-statistics with
finding (Table 5), we see that the Volatility-of-Volatility experiences respect to one and p-values, respectively.
positive values for all k days reporting on the existence of stochastic
volatility in long-term natural gas returns.
Table 7
In Table 7, we present the Volatility-of-Volatility of k day natural gas The k day Volatility-of-Volatility of natural gas returns during all the different
stock returns for every sample period in the study. The Volatility-of- sample periods of study.
Volatility is computed basically on the current Volatility Ratio.
K Day Full Sample period Sample period Sample period
Table 7 indicates that Volatility-of-Volatility is approximately 0 for all sample (1) (2) (2)’
the k day ≥10 during sample period (1), inferring that the volatility of k
1 0.4661 0.4200 0.4677 0.4781
day natural gas returns is non-stochastic for all the k day ≥10. This
2 0.4243 0.3750 0.4041 0.4268
observation might be justified by the fact that long-term natural gas 3 0.3992 0.3356 0.3808 0.3936
4 0.3700 0.2948 0.3490 0.3528
5 0.3610 0.2853 0.3514 0.3599
Table 5
6 0.3460 0.2747 0.3362 0.3332
The k day Volatility Ratio of natural gas returns during the sample period (2)
7 0.3362 0.2608 0.3285 0.3362
(February 24, 2022–December 2022). 8 0.3321 0.2496 0.3278 0.3473
K Day Actual Boot Mean Boot Standard Error W.R.T 1 P-Value 9 0.3209 0.2162 0.3267 0.3575
10 0.3099 0.1909 0.3286 0.3661
1 0.8848 0.8880 0.0354–3.3361 0.0010 11 0.2972 0.1669 0.3360 0.3747
2 0.9156 0.9276 0.0345–2.5197 0.0127 12 0.2949 0.1449 0.3525 0.3822
3 0.9255 0.9440 0.0325 − 2.3629 0.0193 13 0.2860 0.1006 0.3653 0.3944
4 0.9379 0.9530 0.0308 − 2.0878 0.0384 14 0.2884 0.0865 0.3650 0.3956
5 0.9371 0.9570 0.0305 − 2.1377 0.0340 15 0.2884 0.0933 0.3592 0.3903
6 0.9426 0.9629 0.0296 − 2.0033 0.0458 16 0.2874 0.0789 0.3624 0.3959
7 0.9453 0.9660 0.0292 − 1.9409 0.0542 17 0.2831 0.0555 0.3593 0.3953
8 0.9455 0.9695 0.0278 − 2.0325 0.0438 18 0.2800 0.0360 0.3522 0.3871
9 0.9459 0.9729 0.0284 − 1.9741 0.0495 19 0.2815 0.0540 0.3553 0.3800
10 0.9453 0.9737 0.0288 − 1.9699 0.0503 20 0.2775 0.0355 0.3515 0.3681
11 0.9427 0.9762 0.0286 − 2.0832 0.0388
12 0.9366 0.9793 0.0277 − 2.3695 0.0189 Note: This table presents the k day Volatility-of-Volatility of natural gas stock
13 0.9317 0.9815 0.0268 − 2.6422 0.0091 returns for all the different sample periods of study (full sample period, sample
14 0.9318 0.9820 0.0280 − 2.5169 0.0128 period (1), sample period (2) including outliers, and sample period (2)’
15 0.9341 0.9824 0.0283 − 2.4086 0.0171 excluding outliers).
16 0.9328 0.9841 0.0279 − 2.4930 0.0137
17 0.9340 0.9851 0.0268 − 2.5529 0.0116
18 0.9367 0.9861 0.0271 − 2.4186 0.0167 stock returns are approximately normally distributed before the ongoing
19 0.9356 0.9876 0.0273 − 2.4498 0.0153 Russia–Ukraine war crisis (sample period 1). However, the Volatility-of-
20 0.9370 0.9886 0.0264 − 2.4781 0.0142 Volatility does not die down or takes a very long time to do so after the
Note: This table presents the k day Volatility Ratio of natural gas stock returns for continuing Russia–Ukraine war crisis (sample period 2 including or
the sample period (2) (February 24, 2022 to December 2020). Boot Mean de­ excluding outliers), hence implying that long-term natural gas returns
notes the mean of Volatility Ratio calculated from bootstrap samples generated are not normally distributed.
with MATLAB for each k day, the values in column 4 represent the Bootstrap Fig. 3 displays the behavior of the Volatility-of-Volatility across the
standard errors of the estimators, and the values in columns 5 and 6 indicate the post-war phase of Russia–Ukraine war, namely sample period (2)
t-statistics with respect to one and p-values, respectively.

7
S. Chen et al.
Fig. 2. Evolution of the Volatility-of-Volatility measure during pre-crisis period
and post-crisis period of Russia–Ukraine war, k day 1–20. Note: This figure
shows the Volatility-of-Volatility measure as a function of k day (1–20) for the
sample period (1) (June 2011–November 2019) and the sample period (2)
(February 24, 2022–December 2022).
Fig. 3. Evolution of the Volatility-of-Volatility measure during post-crisis
period of Russia–Ukraine war, k day 1–20. Note: This figure shows the
Volatility-of-Volatility measure as a function of k day (1–20) for the sample
period (2) (February 24, 2022–December 2022) and the sample period (2)
(February 24, 2022–December 2022 after removing outliers, i.e., mean ± 3
standard deviations).
including outliers and sample period (2)’ excluding outliers. As can be
observed in Fig. 3, the Volatility-of-Volatility does not decline (decrease)
to 0 even for k day of 20 days. In other words, the volatility is stochastic
also for long-term natural gas returns and, consequently, also long-term
natural gas stock returns are not normally distributed.
Finally, before the Russia–Ukraine war crisis, long-term natural gas
returns are approximately normally distributed for k day ≥10 while in
the post-war timing, the long-term natural gas returns keep being non-
normally distributed also with k-day of 20 days. The present situation
leads to the confirmation in this paper that the hardness and the diffi­
culties for predicting a period when the long-term natural gas returns
would come back to normal taking into account the persistence of an
economy-wide crisis (i.e., Russia–Ukraine war in this paper) and its
related uncertainty.
As pointed out in Section 2, extant literature has insufficient infor­
mation about the nexus between the Russia-Ukraine conflict and vola­
tility of natural gas returns. Majority of the recent studies such as
Antonakakis et al. (2017), Bouoiyour et al. (2019), Demirer et al. (2019),
Su et al. (2019), Plakandaras et al. (2019), Li et al. (2020), Liu et al.
(2019), Wang and Yang (2018), among others, investigated the impact
of geopolitical uncertainty on the volatility of energy markets, pre­
dominantly oil market. All these studies observed increasing fluctua­
tions in the oil market in the wake of geopolitical crises. The insights
from these market experiences enabled formulating hypotheses in this
study. However, given that the oil supply and pricing are mostly decided
based on cartel and, on the contrary, there is no such practice associated
with gas supply and pricing due to poor geopolitical harmony among the
8
Resources Policy 85 (2023) 103792
suppliers (e.g., the USA, Russia, Iran, China, etc.), the findings of this
study have less scope of comparisons with the extant studies on oil
market, therefore, are unique in nature.
5. Conclusion
Continuing Russia–Ukraine war appeared as a shock for the energy
markets with unforeseen degrees of ambiguity and great volatility in key
economic sectors such as crude oil, natural gas and food commodities
like wheat. In light of this backdrop, this paper aimed at examining the
impacts of the Russia–Ukraine war outbreak and examining the struc­
ture of volatility in energy stock returns of the S&P GSCI Natural Gas
Index. The selection of natural gas as a case in this study is justifiable in a
number of ways. First of all, natural gas as a clean energy has a unique
contribution in fast-tracking the speed of green and low-carbon energy
revolution (Liang et al., 2021; Wang et al., 2022). Besides being the
third-largest oil exporter in the world, Russia is ranked among the
largest producers of gas (and food) for Europe. Given this backdrop, the
S&P GSCI Natural Gas has emerged as the most dominant energy natural
gas market in the World (US Department of State, 2021). As an experi­
enced and progressive natural gas stock market, the S&P GSCI provides
valuable insights for future policy formulations.
This paper is able to claim some novelty in its methodological
approach, such as: (a) this is one of first attempts applying the new
volatility ratio analysis to investigate the dynamics of volatility and the
possible influence of the Russia–Ukraine war outbreak on a benchmark
natural gas market; (b) this study employs the new volatility-of-
volatility method to test the distributional nexus of volatility with the
Russia–Ukraine war; and (c) this work analyses the tendency of volatility
in the short run before and after crisis periods to explain further the
association of the Russia–Ukraine war with the natural gas returns. The
above approaches make this study different from similar studies on
energy market volatility that used conventional methodologies to assess
the impacts of Russia–Ukraine war and the influence of related news in
particular. For example, Sokhanvar and Bouri (2022) used event study
approach to identify price and market volatility shocks in the selected
commodities with a Cumulative Abnormal AR model during the war in
Ukraine. The authors also used a similar approach to test to what extent
these countries as both exporters and importers of commodities, i.e., oil,
gas, and food, are affected by the Russia–Ukraine war. The study also
investigated the impact of news.
Prior to the emergence of the Russia–Ukraine war as a global crisis,
we see that the volatility-of-volatility of long-term natural gas returns
goes to zero for k day ≥10, implying normally distributed k-day returns,
starting from k day = 10. Furthermore, the volatility-of-volatility ex­
hibits a fast drop with correspondence to the horizon and corroborates
the evidence about the existence of a fundamental variation in the
structure of volatility in the S&P GSCI Natural Gas market in the wake of
the worldwide war. However, in the post- Russia–Ukraine war crisis
time, the image is fully different, in that the volatility-of-volatility of
long-term natural gas returns does not die down to zero also for k day =
20. Hence, long-term natural gas returns are not normally distributed
but keep a mixture of normals. This implies a wildly random situation
for the volatility over the post-war crisis time. Overall, our findings are
robust and provide the persistence of energy volatility which does not
die down following the Russia–Ukraine war crisis period.
This research has important implications to offer in the context of
investment management, energy asset pricing and energy economics.
Overall, our findings appear to highlight well that uncertainty and war
periods can certainly trigger an obvious intent by investors to make the
best decisions and strategies and to not copy the behavior of other in­
vestors. Further, our results can be utilized by regulators, policymakers
and practitioners to develop an understanding of the volatility behavior
in natural gas asset returns on the basis of the outcome of the Volatility
ratio, and formulate governmental policies adapted to face the precar­
ious effects of any global war crisis like the recent Russia–Ukraine war.
S. Chen et al.
Moreover, practitioners who would like to comprehend the volatility
behavior under natural gas asset returns may make use of the novel
method of volatility ratio as one of the most important risk metrics to
assess volatility in energy asset returns especially during the ongoing
Russia–Ukraine war crisis period in natural gas market and global en­
ergy markets.
Given that global energy stocks are traded in various exchange
houses and quoted in diverse range of currencies, investments evolve in
various patterns worldwide and the price volatility of global energy
stocks differs in various exchanges accordingly. Furthermore, it depends
on the volatility of the local economy currency against the USD dollar.
This however offers an opportunity for arbitrage. Although our empir­
ical findings may not be generalized, we could anticipate a similar
pattern in the non-presence of an opportunity of arbitrage opportunity.
Future work in this area can be extended to identifying the presence of
more than one dramatic change using volatility ratio statistics in energy
markets. Similar analysis can also be extended to other commodities and
food markets. Alternative research approach from energy economics
may be used to examine the effectiveness and the performance of this
volatility ratio estimator compared to the volatility estimators in the
extant literature. The volatility ratio can also make clues to enhance
awareness about the new factors that affect energy investors’ choice and
decision making for investments, especially in times of crises.
The Russia-Ukraine war is still ongoing and the situation is getting
more intense and complex due to the increasing involvements of coun­
tries in the global geopolitics, causing further division between NATO-
member countries and Russia and their economic and political allies,
as well as the latter’s inquest of exploring new routes of energy trading.
Given this backdrop, the inferences drawn in this research based on a
defined timeframe (i.e., 1 June 2011–31 December 2022) cannot be
taken firmly for policy formulation, until its robustness is checked and
reconfirmed through a follow up analysis in a post-war period. More­
over, as emphasised by Adekoya et al. (2022) and Lo et al. (2022), “the
ultimate impact of the war on the world economy, currently reflected in
rising energy prices and the reaction of global financial markets, remains
challenging to assess” (Karkowska and Urjasz, 2023, p.1) until the
ongoing conflict ends through a peaceful settlement.
Funding
Not applicable.
Availability of data and material
Data available on request due to privacy/ethical restrictions.
Code availability
Not applicable.
Authors’ contributions
Not applicable.
Ethics approval
Not applicable.
Consent to participate
Not applicable.
Consent for publication
Not applicable.
9
Resources Policy 85 (2023) 103792
Funding statement
The authors received no financial support for the research, author­
ship, and/or publication of this article.
Ethics approval statement
This article does not contain any studies with human participants or
animals performed by any of the authors.
Declaration of competing interest
There is no conflict of interest in the paper.
Data availability
Data will be made available on request.
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