Analyzing the connectedness among geopolitical risk, traditional energy and carbon markets

Abstract

This paper studies time-frequency connectedness using the Diebold Yilmaz method and the Baruník and Křehlík method to examine the relationship among geopolitical risk, traditional energy (coal, oil and gas) and carbon markets. First, geopolitical risk shows stable positive net spillovers in the medium and long term, but fluctuates in the short term. Second, the total connectedness is greater in the short term, and strengthened in the period of rising geopolitical risk with the changes of connectedness paths. Third, in general, the carbon market has greater impact on the geopolitical risk than it has been affected. Finally, as a sub-indicator of geopolitical risk index, geopolitical acts index generally contributes more, but natural gas is more affected by geopolitical threats index. Our results provide useful knowledge for governments to realize their goal of policymaking, and help industrial enterprises make timely adjustments to their energy strategies. In addition, we hope that investors can pay attention to the spillover effect and reduce investment risk.