Heterogeneous effects of common volatility in energy commodity markets on the structure of inter-sectoral connectedness within the Chinese stock market

Baifan Chen, Jionghao Huang, Lianzhou Tang, Jialu Wu and Xiaohua Xia

International Review of Financial Analysis, 2025, vol. 102, issue C

Abstract: Understanding how volatility in energy commodity markets reshapes the return and risk dependencies among financial assets is crucial for maintaining financial stability. This study investigates the effects of common volatility in energy commodity markets (COVOE) on the network structure of inter-sectoral return connectedness within the Chinese stock market. We classify 5178 Chinese mainland-listed companies into 18 sectors and compute COVOE for these sectors, employing the global common volatility methodology. Concurrently, we construct daily sectoral composite stock price indices, weighted by market capitalization, and employ the Diebold-Yilmaz (DY) connectedness approach to measure return connectedness among them. Further, we develop a novel algorithm to remove insignificant links within inter-sectoral return connectedness networks. Results reveal that increases in common volatility in global energy, oil, and natural gas commodity markets significantly enhance the return connectedness among Chinese stock sectors, whereas rising common volatility in the coal market reduces the connectedness. Different types of energy commodity market volatility exhibit varying impacts on the net spillover of sectoral return information. Time-varying analysis suggests a declining impact of common volatility in energy commodity markets on sectoral return connectedness. Additionally, temporal and cross-sectoral heterogeneity is observed in the impact of common volatility in energy commodity markets on the net spillover of sectoral return information. The study highlights the intricate relationship between energy market volatility and the financial market, providing valuable insights for risk management and policy formulation.

Keywords: Common volatility; Energy commodity markets; Network structure; Inter-sectoral connectedness; Stock market (search for similar items in EconPapers)
JEL-codes: B26 C32 C58 G11 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:102:y:2025:i:c:s1057521925002157

DOI: 10.1016/j.irfa.2025.104128

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