An exploration of sources of volatility in the energy market: An application of a TVP-VAR extended joint connected approach

Abstract

The energy market is volatile, but it became particularly gloomy when the COVID-19 pandemic broke out. We employ a time-varying parameter vector autoregression (TVP-VAR) in combination with an extended joint connectedness approach to identify the sources of the energy market’s volatility. We study the interlinkages between four markets, namely the energy, crude oil, gold, and silver markets by characterizing their connectedness, employing data from January 1, 2018, to December 31, 2021. Our results demonstrate that health shocks appear to have an influence on the system-wide dynamic connectedness, which reached a peak during the COVID-19 pandemic. Net total directional connectedness suggests that the oil and gold markets consistently appear to be the net transmitter of spillover shocks to the energy market. The roles of these two markets became more apparent during the COVID-19 health crisis. Although the silver market played different roles during the studied period, it also acts as a net transmitter of spillover shocks to the energy market during uncertain times. Pairwise connectedness highlights the significance of crude oil, gold, and silver as net transmitters of the effects of shocks to the energy market.