Do macroprudential policies reduce risk spillovers between energy markets?: Evidence from time-frequency domain and mixed-frequency methods

Qichang Xie, Yu Bai, Nanfei Jia and Xin Xu

Energy Economics, 2024, vol. 134, issue C

Abstract: Preventing volatility spillovers between energy markets is essential for maintaining financial stability. Macroprudential policies play an invaluable tool in financial risk monitoring and help to reduce the incidence of systemic risk. However, the effectiveness of macroprudential policies on risk spreads in the energy system is still unclear. This article applies the TVP-VAR (time-varying parameter vector autoregression) spillover methods to capture the risk connectedness between energy markets in the time and frequency domains, and constructs an asymmetric GARCH-MIDAS-MPP model to investigate the influence of macroprudential policies on volatility overflows of the energy system. The results suggest that there are strong risk links between global energy markets and long-term risk resonances play a dominant role. Time-varying risk overflows occur throughout the energy sector, and market turbulence amplifies these risk communications. Whether on a time or frequency horizon, the oil market represents the largest emitter of fluctuation transmissions, while the fuel oil market stands out as the biggest recipient of risk diffusion. We do not observe that macroprudential policies can significantly reduce the average and long-run risk premiums of the energy system. Conversely, our results reveal that macroprudential policies intensify short- and medium-term risk spreads between global energy markets. This paper provides some insight into energy market risk contagion, which is conducive to the improvement of macroprudential policies for energy market risk management.

Keywords: Energy market risk spillover; GARCH-MIDAS-MPP model; Macroprudential policy; Mixed-frequency; Time-frequency domain; TVP-VAR model (search for similar items in EconPapers)
JEL-codes: E44 E52 G11 O13 Q43 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:134:y:2024:i:c:s0140988324002664

DOI: 10.1016/j.eneco.2024.107558

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