Financial Sector Troubles and Energy Markets

Abstract

Literature shows the dynamics of energy markets impacting a variety of sectors. In response to the 2007/2008 financial crisis, the U.S. Treasury provided financial assistance (bailouts) to hundreds of public and private financial institutions under the Troubled Asset Recovery Program (TARP) and the Targeted Investment Program. Several studies suggest that bailouts alter the risk profile of the receiving companies. Since risk profiles are at the core of volatility transmissions between asset groups, in this study, we evaluate the volatility impacts of energy markets on these financial institutions before and after they received financial assistance. After controlling for systematic components, our findings show no volatility transmission before the financial intervention but suggest robust volatility transmission from oil and natural gas markets to the bailout banks post bailouts.