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

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.
Type
Journal Article
Type of thesis
Series
Citation
Date
2023
Publisher
Elsevier BV
Degree
Supervisors
Rights
©2023 The Author(s). This is an open-access article under the CCBY license (http://creativecommons.org/licenses/by/4.0/).