Exploring the dynamic behaviour of commodity market tail risk connectedness during the negative WTI pricing event

Yang Hu, Chunlin Lang, Shaen Corbet, Hou, Yang (Greg) and Les Oxley

Energy Economics, 2023, vol. 125, issue C

Abstract: Using a TVP-VAR analytical framework, this study explores the change and persistence of the dynamic connectedness of international energy and carbon credit markets. The overall destabilising effects generated by recent political and epidemiological events, and the subsequent consequences of shocks such as the negative WTI pricing event, have the potential to be disruptive to the continued growth and development of several regional oil markets. Results are presented via a comprehensive analysis of the dynamics of extreme risk spillovers for particular commodity pairs. In particular, WTI and Brent crude oil are found to have transmitted significant tail uncertainty shocks to other energy markets. However, Shanghai crude oil and carbon credit markets typically function as shock absorbers. The remaining energy-related commodities primarily function as tail uncertainty receivers. Further, by incorporating EGARCH-based robustness procedures, tests for significant market connectedness within international energy markets adds further validity to the results. Specifically, results relating to the substantial rebalancing of information to Shanghai crude oil futures and EUA carbon futures merit special consideration, as dynamic interactions strengthen evidence supporting their continued maturation into significant international markets. These findings are particularly interesting to policymakers and market participants who use such products to hedge against and diversify regional oil market fluctuations.

Keywords: TVP-VAR; Dynamic connectedness; Oil markets; EGARCH; Negative valuation (search for similar items in EconPapers)
JEL-codes: C01 C22 C58 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:125:y:2023:i:c:s0140988323003274

DOI: 10.1016/j.eneco.2023.106829

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