Extreme risk spillover between crude oil price and financial factors

Abstract

This paper uses the connectedness network model to analyze the risk spillover between WTI returns and 8 important financial factors in extreme risk scenarios. The findings show that WTI behaves as a net risk receiver in the risk spillover network, while the Financial Stress Index (FSI), non-commercial short and long positions in crude oil futures (NCS, NCL) are the biggest net risk transmitters. The dynamic results indicate that total connectedness degree presents time-varying characteristics and increased sharply during the financial crisis. The NCS and NCL's risk spillover to WTI increased since 2016 due to the financialization of commodity markets.