Energy security risk and financial development nexus: Disaggregated level evidence from South Korea by cross-quantilogram approach

Abstract

Countries have been aiming to reduce dependence on fossil fuel energy and increase the use of clean energy. In this context, energy security has become one of the most important issues for countries, especially in light of the recent energy crisis that threatens energy security. The financial structure of the countries can be also influential in ensuring energy security. By taking higher fossil fuel energy dependence resulting in higher energy security risk (ESR) and higher financial development (FD) into consideration, the study analyzes how FD affects energy security in South Korea, which is an important case and neglected in the current literature. To do so, the study considers the ESR index as the dependent variable, uses disaggregated level FD indicators as explanatory variables, conducts a novel cross-quantilogram method to account for the quantile dependence, and uses data between 1980/Q2 and 2018/Q4. The findings reveal that (i) disaggregated level FD indicators are powerful estimators of ESR; (ii) the financial markets component has a much stronger effect on ESR than the financial institutions component; (iii) the effect of FD sub-components on ESR varies across quantiles; (vi) the predictive power of the FD indicators on ESR weakens as time (lag) passes. The study emphasizes the critical role of FD on ESR, which implies that South Korean policymakers should consider the significant effect of FD and its sub-components as well as changing structure across quantiles and time-lags in shaping policy framework to ensure energy security. Based on the outcomes, South Korea can benefit from FD to mitigate ESR and ensure economic and environmental sustainability.