Extreme time-frequency connectedness between energy sector markets and financial markets

The renewable energy market has developed into a distinct asset class that has garnered significant attention from investors worldwide. This study investigates the connectedness between the S&P 500 and various energy sectors, including the Green Bond (Green Bond), S&P GSCI Carbon Emission Allowances Index (GSCI EUA), S&P GSCI Biofuel (GSCI Biofuel), and S&P Global Clean Energy Indices (Global Clean Energy). Combining the quantile connectedness approach of Ando et al. (2022) and the spillover index developed by Chatziantoniou et al. (2022), we investigate the quantile time-frequency connectedness among these markets. Our findings reveal that the impact of tail risk spreading to the energy sector during extremely challenging market conditions is significantly amplified. Most tail risk spillovers between the energy sectors involve short-term risk spillovers, as seen by analyzing the frequency domain. The impact of tail risk spillover is stronger during extreme situations, showing a short-term asymmetry. Global Clean Energy and the S&P 500 play important roles in spreading risk to other sectors, known as tail risk spillover. They add to the overall risk that affects the network system. On the other hand, other energy sectors (GSCI EUA and GSCI Biofuel) as well as green bonds act as net recipients by receiving the risk rather than spreading it further, potentially providing portfolio diversification. It is essential to understand how these key players influence risk in the financial system. Utilizing a variety of techniques to assess portfolio performance shows the importance of understanding the return transmission mechanism in the process of developing a portfolio and suggests that Clean Energy, given its relative independence, may make an excellent diversification investment.