**5. Conclusions**

This paper examined the connectedness between the Henry Hub natural gas price and the BRICS's exchange rates. To that end, the connectedness methodology from Diebold and Yilmaz (2009, 2012, 2015) as well as frequency decomposition of connectedness proposed by Baruník and Kˇrehlík (2018) were used. We collected data from 23 August 2010 to 20 June 2019 and tested both return series and volatilities from GARCH models.

Our empirical results show that the total connectedness was 22.5% in the return series and 11.7% in volatilities. Compared to results from previous studies—such as Lundgren et al. [13] who found that the total volatility connectedness among renewable energy stock returns, investment assets, and several sources of uncertainty is 67.4%—our results are modest, which means that most variation was due to the variation in the variables themselves. By taking the frequency decomposition of connectedness, we found that, in the return series, the short term contributes to the total connectedness the most, whereas the long term contributes most in relation to volatility. From the results of net pairwise connectedness between the natural gas price and exchange rates, we obtained a value of almost zero in each natural gas and exchange rate pair, which means that natural gas does not play an important role in explaining movements in the exchange rates. We also applied a rolling-window approach to conduct the time-varying analysis. In short, the results are similar to those of the constant analysis and we cannot say for certain that the natural gas price had a grea<sup>t</sup> influence on exchange rate movement. Only in the plot of volatility connectedness were there several dramatic fluctuations, which we consider to be connected to some notable events, such as economic crises and trade frictions.

Our results are obviously di fferent from the results of the studies on the relationship between the oil price and exchange rates, such as that conducted by Singh et al. (2018), who found that the total volatility connectedness between the oil price and nine exchange rates reached 72.96%. The shocks transmitted from crude oil to each exchange rate are also significant. We consider some possible reasons for the di fference. First, crude oil can be used more widely across di fferent fields than natural gas. For example, it can fuel our cars and make plastics, rubbers, and the like, which are uses that cannot be replaced by natural gas. As indicated in the BP Statistical Review of World Energy [1], crude oil has the highest share in global energy consumption, and its consumption is almost double that of natural gas. Second, the production of crude oil far exceeds that of natural gas. Therefore, whether for energy import countries or energy export countries, crude oil is more easily traded. Third, compared to developed countries, awareness of the environment in developing countries is at a lower level. As the BRICS are the focus of our study, although their consumption of natural gas has increased in recent years, natural gas is still not the primary energy source for these countries (with the exception of Russia). India, China, and South Africa consumed coal the most in 2019, while Brazil consumed oil the most [1].

Although crude oil plays an irreplaceable role in the energy market now, with increasing environmental awareness, we believe that natural gas will become more important and the connectedness between the natural gas price and exchange rates will become stronger in the future.

The empirical evidence in this study may have important implications for policymakers, especially those in oil-dependent countries. As much of the literature shows that exchange rates are highly dependent on the oil price, turbulence in the crude oil market could have a grea<sup>t</sup> impact on the foreign currency market, thus causing exchange rate pressure and even economic instability. In order to solve the foreign exchange fluctuation, monetary authorities need to accumulate or reduce foreign exchange reserves, which is not considered desirable in the real world. Changing the dependence structure in relation to energy—from depending on energy that is closely connected with the currency market, such as crude oil, to depending on energy that is hardly connected to the currency market, such as natural gas—could provide an e fficient way of maintaining economic stability and reducing exchange rate pressure. By contrast, because of the low connectedness between the natural gas price and exchange rates, foreign exchange fluctuation may barely be a ffected by the natural gas price. Therefore, for investors, it is less risky to invest in gas-related financial products than oil-related financial products, which are highly connected with currency.

Although this paper conducted thorough research, there were several limitations in the empirical work. First, although we found that natural gas did not have a significant impact on the exchange rate, this result could be influenced by the data selection. We used Henry Hub as our natural gas price data, which represents the North American natural gas market. However, given the restriction of pipelines and high transportation cost, North American countries that produce natural gas may not be the primary selection for BRICS. Second, with technological improvements in exploiting natural gas and the increasing number of gas liquefaction plants, we assumed that the LNG price would have more influence on the exchange rate than the pipeline natural gas price did. However, owing to data limitations, we could only focus on the whole natural gas market, which may be the reason why the connectedness between the natural gas price and exchange rates was modest. Therefore, for further extension of this research, first, we want to collect different natural gas price data, such as the Netherlands Title Transfer Facility (TTF) index and Japan Korea Marker, to exclude the impact of data selection on the results. Second, we want to analyze the relationship between the crude oil price and exchange rates and the relationship between the crude oil price and natural gas price. This would allow us to compare the connectedness between the crude oil price and exchange rates with that between the natural gas price and exchange rates more rationally. Finally, if the data permit, we want to use the data on only LNG to find the connectedness between the natural gas price and foreign exchange rates more precisely.

**Author Contributions:** Conceptualization, S.H.; investigation, Y.H.; writing—original draft preparation, Y.H.; writing—review and editing, T.N.; project administration, S.H.; funding acquisition, S.H.

**Funding:** This work was supported by JSPS KAKENHI Grant Number 17H00983.

**Acknowledgments:** We are grateful to four anonymous referees for their helpful comments and suggestions.

**Conflicts of Interest:** The authors declare no conflicts of interest.

#### **Appendix A Robustness Analysis**

We used the Henry Hub natural gas spot price (GASS) as the natural gas price data to examine the robustness of our results. (The natural gas futures index in the United Kingdom, which is known as the UK National Balancing Point (NBP), was also used to conduct the robustness check, but the results were quite similar to those from GASS, so we only present the connectedness table of NBP and exchange rates (Table A2) in Appendix A).

The plot of GASS's return and volatility series are reported in Figure A1. We found that some values of volatility were extremely large (the maximum is over 800). We think that the reason for this is that the natural gas spot price was more easily affected by the change of demand and supply than the future price, even though the change was small.

We summarize the results of connectedness and the frequency decomposition of short, medium, and long term in Table A1, Table A3, Table A4, Table A5, respectively. The result is quite similar to that of GASF and exchange rates. We also used a 300 rolling-window to conduct the time-varying analysis. The dynamic connectedness and its spectral representation are plotted in Figures A2 and A3, respectively. The net pairwise connectedness of return series and volatilities are illustrated in Figures A4 and A5, respectively. All results are consistent with those from the analysis using the natural gas future price, except for the net pairwise connectedness of return series (Figure A4). Some values are opposite to the result above, but all of them are low, even the maximum value, which is less than 5% and negligible.

The results of robustness confirm the suitability of our proposed approach, which aimed to capture the relationship between the natural gas price and exchange rates.


**Table A1.** Connectedness between the natural gas spot price and BRICS's exchange rates.

Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price. From column reports the total directional connectedness from others to *xi*. To row reports the total directional connectedness from *xi* to others. Net row reports the net total directional connectedness. GAS-FX column reports the net pairwise connectedness between the GASS and exchange rates, which is calculated by the GASS to others minus the others to GASS. The number in red represents the largest value in this system. The number in bold means the total connectedness. All results are expressed as a percentage.



Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. NBP is the UK National Balancing Point. From column reports the total directional connectedness from others to *xi*. To row reports the total directional connectedness from *xi* to others. Net row reports the net total directional connectedness. GAS-FX column reports the net pairwise connectedness between the NBP and exchange rates, which is calculated by the NBP to others minus the others to NBP. The number in red represents the largest value in this system. The number in bold means the total connectedness. All results are expressed as a percentage.


**Table A3.** Connectedness between the natural gas spot price and exchange rates in the frequency domain (short term).

Note: The frequency band of short term roughly corresponds to 1 day to 5 days. All results are expressed as a percentage. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.


**Table A4.** Connectedness between the natural gas spot price and exchange rates in the frequency domain (medium term).

Note: The frequency band of medium term roughly corresponds to 5 days to 21 days. All results are expressed as a percentage. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.


**Table A5.** Connectedness between the natural gas spot price and exchange rates in the frequency domain (long term).

Note: The frequency band of long term roughly corresponds to more than 21 days. All results are expressed as a percentage. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.

**Figure A1.** Daily return and volatility: (**a**) return series and (**b**) volatility.

**Figure A2.** Dynamic connectedness: (**a**) total connectedness of return series and (**b**) total connectedness of volatilities. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.

**Figure A3.** Frequency decomposition of dynamic connectedness: (**a**) frequency decomposition of total connectedness for return series and (**b**) frequency decomposition of total connectedness for volatilities. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.

**Figure A4.** Net pairwise connectedness of return series: (**<sup>a</sup>**–**<sup>e</sup>**) refer to the net pairwise connectedness between GASS and BRL, RUB, INR, CNH, and ZAR return series, respectively. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.

**Figure A5.** Net pairwise connectedness of volatility. (**<sup>a</sup>**–**<sup>e</sup>**) refer to the net pairwise connectedness between the volatility of GASS and BRL, RUB, INR, CNH, and ZAR, respectively. Note: BRL, RUB, INR, CNH, and ZAR are Brazilian Real, Russian Ruble, Indian Rupee, offshore Chinese Yuan, and South African Rand, respectively. GASF is the Henry Hub natural gas futures price.
