Tail risk contagion and connectedness between crude oil, natural gas, heating oil, precious metals, and international stock markets

Abstract

We apply the QVAR connectedness and frequency causality methods to investigate tail risk contagion, quantile dependency, and causality linkages among the spot prices of equity, precious metals, and energy commodity markets between 2002 and 2024. Our findings indicate that the average amount of unexpected losses for stock markets is lower than that for other markets. Furthermore, our analysis of tail risk spillovers shows that downside risks are primarily driven by the contributions of others, with the most significant impact occurring when the tail risk is at its lowest. The total downside risks associated with connectedness are greater for lower quantiles and stock markets typically serve as the primary transmitters of shocks across all quantiles. During financial crises, heterogeneous and event-dependent risk spillovers strengthen, but not during pandemics or geopolitical incidents. The SP500, SPTSX, and STOXX50 stock indices are the strongest risk transmitters across quantiles, with SPTSX (AORD) emerging as the most persistent risk transmitter (receiver) across all quantiles and during major specific events. Gold retains its net receiving role during the same periods, except for the upper quantile of financial crises and lower quantile of war periods. There are considerable causal linkages between stock markets, where the effects are often permanent rather than short-lived. WTI, platinum, and silver are often temporary causal drivers, whereas others achieve permanent status. SP500 (natural gas) is the most influential driver, followed by the STOXX50 and SPTSX indices, which represent the most unpredictable markets. Heating oil and palladium are the instruments most susceptible to causal shocks. These results have significant implications for all market participants, and the SP500 index is the greatest temporary and permanent causal predictor market, followed by the SPTSX. Natural gas has the least influence on predicting future tail risk movements, followed by heating oil. Stock markets, especially the STOXX50 and SPTSX indices, are the most unpredictable and resistant to shocks from other factors, whereas heating oil and palladium are the most predictable instruments.