Exploring downside risk dependence across energy markets: Electricity, conventional energy, carbon, and clean energy during episodes of market crises

Abstract

This study examines the relationship of extreme downside risk in various energy markets, including electricity, clean/conventional energy, and carbon markets during several episodes of market turmoil (i.e., Global Financial Crisis, Shale oil revolution, COVID-19 outbreak and the Russian-Ukrainian war). The analysis combines the CAViaR and TVP-VAR techniques, covering the period from August 2005 to May 2023. The results reveal significant interdependencies between electricity and clean energy markets during times of market turmoil. Moreover, the study identifies the transmission of extreme downside risks in periods of crisis. Additionally, we find that including carbon and conventional energy assets in a portfolio with electricity and clean energy can offer diversification benefits. The analysis of net downside risk transmission shows that the crude oil market acts as a net receiver of shocks, while the alternative electricity market functions as a transmitter. Investors and policymakers can leverage these findings to develop appropriate measures that mitigate the adverse effects of extreme downside risk spillovers in different crises.