Connectedness Approach Research Articles

Do geopolitical risks from the economic powers dominate world gold return? Evidence from the quantile connectedness approach

Do geopolitical risks from the economic powers dominate world gold return? Evidence from the quantile connectedness approach

Spillovers and connectedness among climate policy uncertainty, energy, green bond and carbon markets: A global perspective

Extreme weather anomalies, energy crisis and environmental degradation have garnered significant attention in the context of sustainable development. This paper analyses the spillovers among climate policy uncertainty (CPU), energy prices, green bond index, and carbon emission trading price with quantile connectedness approach. The results suggest that connectedness among variables is higher at the extreme quantiles than the median quantile, and the connectedness would strengthen during international events, such as the US withdrawal from the Paris Agreement, COVID-19 epidemic, and Russian-Ukraine conflict. Additionally, the dynamic spillover analysis further demonstrates that CPU consistently acts as the risk receiver and passively bears influence from other markets. The constructed theoretical mechanism provides valuable insights for a comprehensive assessment of climate policy, facilitating the orderly functioning of energy, green finance and carbon markets, and sustainable investment. Thus, the paper concludes that the significant spillover from energy, green bond and carbon markets serve as useful indicators for judging and predicting uncertainties related to climate policy.

Global uncertainty factors and price connectedness between US electricity and blockchain markets: Findings from an R-square connectedness approach

We investigate the interconnectedness between the US electricity market and cryptocurrency, NFTs, and DeFi markets, while considering the conditioning effect of uncertainty factors. We employ an R2 connectedness approach to analyze the shock transmission mechanism and results reveal significant connectedness among these markets with varying degrees of asymmetry in return spillovers. Notably, the US electricity market acts as a receiver of shocks. Further, global uncertainty factors positively influence interconnectedness. Findings provide valuable insights for policymakers and market participants to manage risks and promote a sustainable and resilient ecosystem between the blockchain and electricity markets.

Are there inextricable connections among automobile stocks, crude oil, steel, and the US dollar?

According to the International Organization of Motor Vehicle Manufacturers (OICA), Automobile manufacturers use 40% of steel to make the body structure, 23% to make engines and gears, and 12% for suspensions. We untangled the perceived inextricable connections between crude oil, steel, the US dollar, and stocks of Toyota, Daimler, and Volkswagen as the automobile firms with the largest capitalization by using the time series daily data from 1998 to 2023. We used an augmented version of the Diebold and Yilmaz (2012) connectedness approach, which is based on the Time-Varying Parameter Vector Auto-regression (TVP-VAR) approach as introduced by Antonakakis et al. (2020). Findings suggested that Volkswagen, Daimler, and Toyota are more affected by shocks in steel prices than by USD and oil price shocks, with a spillover of 9%, 11.72%, and 8.72% respectively from steel. The next transmitter is USD, which contributes 4.94%, 6.37% and 3.96% of shocks to Volkswagen, Daimler, and Toyota stocks, and the third variable is the oil price shocks, which contributes 4.25%, 5.41% and 3.50% of spillover effects to Volkswagen, Daimler, and Toyota stocks, respectively. This shows the heterogeneous responses of automobile stocks with the highest capitalization and sales to the error variances transmitted from steel, USD as well as oil. Most notably, overall steel is a net transmitter and USD as net receiver in TYP-VAR system for Toyota and Daimler and can therefore be used as a diversifier. Our findings are impactful for the shareholders as well as portfolio managers for risk reduction and efficient portfolio management.

Decentralized and centralized exchanges: Which digital tokens pose a greater contagion risk?

This study explores the impact of trading activity on both centralized exchanges (CEXs) and decentralized exchanges (DEXs) on information transmission patterns between digital and traditional investment assets. Utilizing a quantile connectedness approach, we analyze the relationships among DEX tokens, CEX tokens, and various assets, including Gold, Oil, Bitcoin, REITs, Equity, Bonds, and the US dollar index. Our results reveal that in the lowest quantile, DEX and CEX tokens primarily receive spillovers, while other assets act as the main transmitters. In contrast, in the upper quantile, DEX and CEX tokens become the primary transmitters of spillovers to other assets. These findings hold significant implications for financial portfolio management, as they demonstrate that during a short squeeze period, DEX-CEX tokens exhibit contagious effects on other assets, diminishing the effectiveness of risk management and portfolio strategies. Furthermore, our study suggests that DEX-CEX tokens serve as optimal hedges for oil, offering a cost-effective alternative for hedging Gold and the USD Index.

Vulnerability of European electricity markets: A quantile connectedness approach

The most recent dramatic increases in European Gas and Electricity prices demonstrate how vulnerable Europe is to energy supply shocks. We investigate the transmission of shocks from natural gas prices to local electricity prices in 21 European electricity markets. Using a quantile connectedness model, we find that the vulnerability of electricity markets in Europe varies both over time and across quantiles. Natural gas price shocks have a significant and nearly symmetrical impact on extreme quantiles of electricity prices. However, for moderate price changes, there is a disconnection between electricity and natural gas markets. We also identify the European countries that are most and least vulnerable to shocks in natural gas prices, which is due to differing energy mixes for electricity production. This novel vulnerability index has implications for the development of country-specific regulations and energy policies aimed at reducing the reliance on natural gas in European economies, combating energy poverty, and promoting the growth of renewable energy sources.

Tail risk contagion across electricity markets in crisis periods

This study examines tail risk contagion across returns series of (i) ten major electricity markets and (ii) five raw materials used for electricity production during crises, using data from 2006M07 to 2023M03. The crises covered, in the study to examine tail risk contagion, are the global financial crisis, the European debt crisis, the COVID-19 pandemic and the Russia-Ukraine war. We estimate tail risk using the Conditional Autoregressive Value at Risk (CAViaR) method and employ the quantile vector autoregression (QVAR) connectedness approach to examine the tail risk spillover. In addition, we examine the effect of uncertainty factors on tail risk spillover. The QVAR result shows significant contagion across the electricity markets during crises, particularly pronounced in extreme quantiles. We identify geopolitical risk as the substantial uncertainty factor driving the contagion across these electricity markets. The findings have significant implications for regulators in formulating policies to reduce the effect of crises and uncertainty factors.

Measuring the G20 stock market return transmission mechanism: Evidence from the [formula omitted] connectedness approach

This study examines the contemporaneous transmission mechanism across the G20 stock market returns employing a novel R2 connectedness framework which combines the network approach of Kenett et al. (2010, 2015) with the connectedness approach of Diebold and Yilmaz (2012, 2014). The employed daily dataset covers G20 stock market returns from January 3rd, 2000 until June 30th, 2022. We find that the dynamic total connectedness is heterogeneous over time and economic event dependent. Furthermore, pairwise R2 decomposed connectedness measures with respect to different crisis periods and dynamic net total directional connectedness measures are discussed. Findings are important for investors and portfolio managers, for risk diversification purposes, as they highlight important dynamics across the markets of interest. We illustrate the reliability of our findings by considering a battery of robustness tests.

Role of precious metals in global risk dynamics: Exploring their impact from a connectedness approach

In this research, we investigate the dynamic relationship between global volatility, as measured by Common Volatility (COVOL), and major precious metals. Utilising the popular Time-Varying Parameter Vector Autoregression (TVP-VAR) model, we uncover distinctive and complex interconnectedness that respond sharply to key global events. Our findings indicate that COVOL typically acts as a volatility receiver from precious metals, revealing that global market volatility is significantly influenced by fluctuations in the precious metals market with pronounced spillover effects experienced during major economic, financial and geopolitical events, underscoring the intricate interplay between global volatility and precious metal values. This research not only deepens our understanding of the global financial landscape but also provides critical insights for policymakers and investors navigating these markets.

Leading and lagging role between financial stress and crude oil

PurposeThe crude oil market plays a key role in addressing the issue of energy economics. This paper aims to detect the causality relationship between the crude oil market and economy based on the financial system.Design/methodology/approachThis paper used the static and dynamic Hatemi-J Bootstrap Toda–Yamamoto and Diebold–Yilmaz connectedness index. The Hatemi-J Bootstrap Toda-Yamamoto approach allows researchers to use nonstationary data and that method is robust to nonnormal distribution and heteroscedasticity. The Diebold–Yilmaz connectedness index model provides researchers to detect the power of connectedness besides linkage direction. The analyzed period is the span from January 3, 2005 to October 3, 2022.FindingsThe results show bidirectional causality in the full sample but unidirectional causality before and after the 2008 financial crisis. During the 2008 financial crisis period and the COVID-19 period, there was a bidirectional and unidirectional causality, respectively. The connectedness approach indicates that the crude oil market affects financial stress through investors’ risk preferences.Research limitations/implicationsThe Diebold–Yilmaz spillover index model is based on vector autoregression methods with a stationarity precondition. However, some of the five dimensions that constitute the financial stress index (FSI) are nonstationary in level. Therefore, the authors takes the first difference of the nonstationary data.Practical implicationsThe linkage between the crude oil market and the FSI provides useful information for investors and policymakers. For instance, this paper indicates that an investor wanted to forecast future value of the crude oil (financial stress) should consider the current and past values of financial stress (crude oil). Moreover, policymaker should consider the crude oil market (FSI) to make a policy proposal for financial system (crude oil market).Originality/valueRecently, indicators of economic activity levels (economic policy uncertainty, implied volatility index) have begun to be considered to analyze the relationship between energy and the economy but very little is known in the literature about the leading and lagging roles of data in subsample periods and the linkage channel. The other originality of this research is using the new econometric approaches.

Do clean and dirty cryptocurrencies connect with financial assets differently? The role of economic policy uncertainty

This paper analyzes time-varying networks of clean and dirty cryptocurrencies with green and traditional assets through a dynamic connectedness approach established by the time-varying parameter vector autoregressive (TVP-VAR) model. The underlying asymmetry of the dynamic pairwise connectedness when facing uncertainty shocks is further studied through a non-parametric quantile causality method. Our results demonstrate a limited information transmission of volatility from cryptocurrencies to both traditional and green assets, while the connection of clean cryptocurrencies (CI) with the financial system is even weaker compared to that of dirty cryptocurrencies (DI), especially after the COVID-19 pandemic. In contrast, connection within the financial system is found to be relatively closer. Moreover, causal relationships between economic policy uncertainty (EPU) and cryptocurrency-financial asset linkages are generally enhanced after the pandemic onset, while such the causality of uncertainty with DI related asset linkages tends to be even stronger. Most of the above causalities are shown to be negligible during market depression, further implying the sheltering role of the market linkages against uncertainty.

An examination of green bonds as a hedge and safe haven for international equity markets

Green bonds are a type of fixed-income instrument that specifically designed to fund environmentally friendly projects. Investigating the performance of green bonds is essential to gain insights into the risk-return characteristics and dynamics within sustainable finance and their potential role in portfolio diversification. In this paper, we comprehensively examine the ability of green bonds to act as a hedge or a safe haven against nineteen international equity market movements (most of the G20 and Switzerland) over the 2014–2022 period. Using regression analysis, we find that green bonds had acted as a strong hedge for many countries but have lost such property for utmost after the COVID-19 outbreak, while they still provide safe haven benefit for many countries' equity indexes. By the use of a novel CAViaR-based TVP-VAR connectedness approach, we further examine the tail risk spillovers among green bond and international equities which extends the consideration in extreme loss (VaR) perspective. We show that the spillovers rapidly increased during the first wave of COVID-19 and has remained at relatively high level until recent days. In combination of all metrics, we argue that Saudi Arabia might be the only country that has received as good (or even better) protection from green bond in the post-pandemic era as (than) before. Overall, these should increase the attractiveness of green bonds as elements of a portfolio, enhancing the green transition.

Return and volatility connectedness among the BRICS stock and oil markets

This study revisits return and volatility contagion among the oil and the stock markets of BRICS over the period of September 14, 2001 to June 17, 2022 using connectedness approach. In terms of shock transmissions, empirical results indicate that the stock market in China and India are net receivers and that in Brazil, Russia and South Africa are net transmitters. In addition, the oil market is the net receiver as well. Both returns and volatility spillovers give us the same conclusions. This evidence provides important implications for the investors, practitioners and government.

Higher-order moment risk spillovers and optimal portfolio strategies in global oil markets

Investigating the dynamic interdependencies and risk connectedness in global oil markets is paramount for investors and regulatory bodies. Nevertheless, prevailing research has predominantly focused on the examination of lower-order moments, thereby imposing limitations on the extent of inquiry. This paper undertakes an analysis of higher-order moment risk spillovers in global oil markets employing the innovative time-varying parameter vector autoregression (TVP-VAR) extended joint connectedness approach. Moreover, this study pioneers the construction of minimum connectedness portfolio strategies encompassing oil markets worldwide, incorporating the outcomes of higher-order moment risk connectedness into multivariate portfolio construction. Our empirical investigation unequivocally highlights the ascendance of OPEC oil as the preeminent net transmitter of connectedness across all moments, reinforcing its pivotal role in the transmission of risk. Furthermore, our findings disclose significant heterogeneity in the connectedness outcomes, with discernible variations across diverse moment orders. Remarkably, the oil benchmarks of WTI and Brent undergo a discernible transformation, transitioning into net recipients when subjected to higher-order moment risk spillovers. Additionally, the dynamics of equicorrelations, pairwise correlations, as well as the time-varying total, net, and net-pairwise connectedness indices, exhibit a high degree of responsiveness to major crisis events. Finally, the incorporation of higher-order moment risk spillovers into oil portfolio strategies manifests enhanced efficacy in risk management. The policy implications derived from our findings bear practical significance for an array of stakeholders, including cross-market investors, portfolio managers, regulatory entities, and policymakers.

Connectedness and portfolio hedging between NFTs segments, American stocks and cryptocurrencies Nexus

The paper examines the dynamic spillover and hedging effectiveness between five main segments of NFTs, which are Collectibles, Art, Game, Metaverse, and Utility, and the other asset classes namely Bitcoin and the American Stocks (S&P500). The study sample covers the period from April 27, 2018 to September 15, 2022. Using a Time-Varying connectedness approach through the TVP-VAR model and inspired by the Diebold and Yilmaz spillover index, the results show weak dynamic return spillovers between NFTs and the other assets, indicating that these new digital assets are still relatively decoupled from traditional asset and Bitcoin. We find also that Bitcoin is a major transmitter of spillover whereas Collectibles, Utility and S&P500 are net recipients of spillovers. Using the DCC-GARCH model, we extract the optimal weights, hedge ratios, and hedging effectiveness for the pairwise portfolios composed of S&P500/NFTs and Bitcoin/NFTs. The results indicate that investors and portfolio managers should consider adding NFTs in their portfolios of either S&P500 or Bitcoin to achieve diversification benefits. Finally, for Robustness Checks, we forecast the performance of the hedged versus the unhedged portfolios using the Long Short-Term Memory (LSTM) networks. Our findings confirm almost the results of the hedging effectiveness of NFTs and stem for the superiority of metaverse among these assets to serve as a perfect hedge.

Interconnectedness of Cryptocurrency Uncertainty Indices with Returns and Volatility in Financial Assets during COVID-19

This paper investigates the dynamic relationship between cryptocurrency uncertainty indices and the movements in returns and volatility across spectrum of financial assets, comprising cryptocurrencies, precious metals, green bonds, and soft commodities. It employs a Time-Varying Parameter Vector Autoregressive (TVP-VAR) connectedness approach; the analysis covers both the entire sample period spanning August 2015 to 31 December 2021 and the distinct phase of COVID-19 pandemic. The findings of the study reveal the interconnectedness of returns within these asset classes during the COVID-19 pandemic. In this context, cryptocurrency uncertainty indices emerge as influential transmitters of shocks to other financial asset categories and it significantly escalates throughout the crisis period. Additionally, the outcomes of the study imply that during times of heightened uncertainty, exemplified by events such as the COVID-19 pandemic, the feasibility of portfolio diversification for investors might be constrained. Consequently, the amplified linkages between financial assets through both forward and backward connections could potentially compromise financial stability. This research sheds light on the impact of cryptocurrency uncertainty on the broader financial market, particularly during periods of crisis. The findings have implications for investors and policymakers, emphasizing the need for a comprehensive understanding of the interconnectedness of financial assets and the potential risks associated with increased interdependence. By recognizing these dynamics, stakeholders can make informed decisions to enhance financial stability and manage portfolio risk effectively.

Dynamic spillover effects of global financial stress: Evidence from the quantile VAR network

This paper investigates the spillover effects of financial stress at different quantile levels across the US, China, Eurozone, Japan, UK and India using a dynamic connectedness approach based on QVAR. The findings suggest significant spillover effects of financial stress among the six countries (regions), and the spillovers in extreme markets are apparently higher than those in normal markets. The US is the main transmitter of financial stress spillovers, while Japan and India are the net receivers. Furthermore, we show that the spillover effects of financial stress are time-varying, and the connectedness at the extreme upper and lower quantiles is asymmetric. In extreme markets, the directional spillover effects of China, India and Japan are significantly enhanced. These findings provide investors, regulators and governments with systematic insights to effectively identify and prevent financial risks.

The nexus between herding behavior and spillover: evidence from G7 and BRICS

PurposeThis study aims at exploring the nexus between herding behavior and the spillover effect in G7 and BRICS stock markets.Design/methodology/approachThe authors used the dynamic connectedness approach TVP-VAR model of Antonakakis et al. (2019) to capture the spillovers across different markets. Moreover, to explore herding behavior, the authors used a modified version of the CSAD measure of Chang et al. (2000) including extreme market movements. Finally, to study the link between these two phenomena, the authors estimated a DCC-GARCH model.FindingsThe results show that herding behavior exists in the American market and some BRICS markets. Furthermore, spillover between G7 and BRICS increases in times of crisis. Moreover, the authors find a dynamic conditional correlation between herding behavior and spillovers both in the short and long run. The authors conclude that in times of crisis, the transmission of shocks between markets is more frequent, fuelling uncertainty and pushing investors to suppress their own beliefs and follow the general market trends.Originality/valueThis paper uses the TVP-VAR model to explore the spillover effect and the DCC-GARCH model to explore the connectedness between herding behavior and the spillover effect in G7 and BRICS countries in both the short and long run.

A quantile-time-frequency connectedness investigation through the dirty and clean cryptocurrencies spillover

We analyze how the return connectedness between cryptocurrencies and environmental market indexes evolves in the last decade. The current study is the first to examine whether clean and dirty cryptocurrencies are linked to the U.S. environmental stock market indexes across time-frequency-quantile space. Using a time-frequency quantile connectedness approach, the main results are as follows: (i) the dynamic total connectedness indices are found to be heterogenous over the time-frequency space. (ii) Ethereum appears to be both short- and long-run net transmitters of shocks, while both U.S. environmental market indexes seem rather be both short- and long-run net receivers of shocks. Regarding Bitcoin, Cardano, and Ripple series, the net transmission/reception of short-term/long-term shocks is found to be time-varying. (iii) The majority of relationships among markets are time-varying in both short- and long-run net transmission positions. (iv) Over time-frequency quantile space, both short- and long-term dynamic total connectedness are found to be asymmetric, while the overall dynamic total connectedness seems to be symmetric. (v) The sensitivity of investors to clean and dirty cryptocurrencies-, and environmental market indexes-related shock spillovers tend to change over the quantile-time-frequency space. (vi) Important implications for investors and policymakers are also provided.

Dynamic connectedness between China green bond, carbon market and traditional financial markets: Evidence from quantile connectedness approach

The present study employs the quantile connectedness approach to examine the linkage among China’s green bond market, carbon market, and traditional financial markets within a network system. The results of our study indicate that the stronger connectedness of system is driven by special events. During periods of extreme market conditions, foreign exchange and carbon markets exhibit a net-receiving behavior, whilst the bond markets play the net-transmitting roles. Additionally, stock and commodity markets exhibit asymmetric and alternate between net-receiver and net-transmitter status. These insights have the potential to inform and shape portfolio allocations.