Volatility transmission between upstream and midstream energy sectors

This research studies volatility dynamics of the returns to upstream (exploration and production) and midstream (pipeline and storage) energy (oil and gas) sectors over time and across sectors. We find significant structural breaks in volatility of upstream sector returns possibly triggered by major events, while no breaks are detected in the midstream sector. These results indicate the midstream sector is fairly insulated from major events relative to the upstream sector. Results based on a bivariate generalized ARCH model, which controls for breaks, indicate that the conditional variance of the upstream sector is significantly more affected by midstream volatility than vice versa. This finding could be due to the fundamental difference in functions performed by the midstream and upstream sector firms. These patterns in volatility dynamics have practical significance for financial market participants.