Energy Economics 127 (2023) 107082

Contents lists available at ScienceDirect

Energy Economics
journal homepage: www.elsevier.com/locate/eneeco

Exploring downside risk dependence across energy markets: Electricity,

conventional energy, carbon, and clean energy during episodes of
market crises
Muhammad Abubakr Naeem a, b, *, Nadia Arfaoui c
a
College of Business and Economics, United Arab Emirates University, P.O. Box 15551, Al-Ain, United Arab Emirates
b
Adnan Kassar School of Business, Lebanese American University, Beirut, Lebanon
c
ESCT-Business School of Tunis, University of Manouba, Manouba, Tunisia

A R T I C L E I N F O A B S T R A C T

Keywords: This study examines the relationship of extreme downside risk in various energy markets, including electricity,
CAViaR clean/conventional energy, and carbon markets during several episodes of market turmoil (i.e., Global Financial
TVP-VAR Crisis, Shale oil revolution, COVID-19 outbreak and the Russian-Ukrainian war). The analysis combines the
Electricity
CAViaR and TVP-VAR techniques, covering the period from August 2005 to May 2023. The results reveal sig­
Clean energy
Carbon
nificant interdependencies between electricity and clean energy markets during times of market turmoil.
Oil Moreover, the study identifies the transmission of extreme downside risks in periods of crisis. Additionally, we
Natural gas find that including carbon and conventional energy assets in a portfolio with electricity and clean energy can
offer diversification benefits. The analysis of net downside risk transmission shows that the crude oil market acts
as a net receiver of shocks, while the alternative electricity market functions as a transmitter. Investors and
policymakers can leverage these findings to develop appropriate measures that mitigate the adverse effects of
extreme downside risk spillovers in different crises.

1. Introduction Another interesting source of CO2 emission is electricity generation

The continued expansion of the world’s population accompanied by
global economic growth has increased the consumption of energy which
releases carbon dioxide emissions (Lee, 2013; Naeem et al., 2020). In
this spirit, climate change and global warming have become of great
concern due to their environmental adverse effects. Issues such as water
shortages, extreme weather events (e.g., floods, fires, storms, and
droughts), rising of sea levels and extinction of species have sounded
alarm bells for humankind (Naeem et al., 2021; Li et al., 2023). Carbon
dioxide emissions arise mainly from the consumption of fossil fuels,
including coal, natural gas, and oil (Sims et al., 2003). For instance,
according to the carbon project report (2022), global carbon dioxide
emission arises from fossil fuels reached its maximum in 2022 with
about 36.6bn tonnes of CO2 (GtCO2).1
which is responsible for over a third of world’s global CO2 emissions in
2022, which is due to the burning of fossil fuels to generate heat needed
to power steam turbines (Global Electricity Review, 20222). In 2022,
global electricity generation comes from fossil fuels provided alone 61%
of electricity generation. Approximately, 36% of this comes from coal,
22% from gas and 3% from other fossils. The global electricity sector is
the largest CO2 emitter which contributes alone for the release to the
atmosphere of >12,431 million tons of CO2 in 2022 (Global Electricity
Review, 2022).3 Currently, over 70% of the world’s electricity is still
generated using non-renewable sources, mainly non-renewable thermal
and nuclear sources.
The heavy dependence of electricity market on fossil fuels and its
adverse effect on the environment, raised policymakers’ concerns on
climate change and the insufficient electricity supply. Despite the

* Corresponding author at: College of Business and Economics, United Arab Emirates University, P.O. Box 15551, Al-Ain, United Arab Emirates.
E-mail addresses: muhammad.naeem@uaeu.ac.ae, m.ab.naeem@gmail.com (M.A. Naeem), nadia.arfaoui.eccofiges@esct.uma.tn (N. Arfaoui).
1
https://www.globalcarbonproject.org/
2
https://ember-climate.org/insights/research/global-electricity-review-2023/
3
https://ember-climate.org/insights/research/global-electricity-review-2023/

https://doi.org/10.1016/j.eneco.2023.107082
Received 12 July 2023; Received in revised form 3 September 2023; Accepted 23 September 2023
Available online 10 October 2023
0140-9883/© 2023 Elsevier B.V. All rights reserved.
M.A. Naeem and N. Arfaoui
development and diffusion of renewable energy technologies, oil still the
leaders with 33% of all energy consumption in 20204 (Anwer et al.,
2022; Yousaf et al., 2022b). Until now, renewable energy is not popular
enough, and the world’s gas and oil reserves would project to be drained
during this century and coal will be depleted in 114 years (Musa et al.,
2018).
To deal with these environmental issues, substantial actions have
been taken by policymakers to achieve net zero carbon emissions
strategy and by moving from non-renewable to renewable and clean
energy sources to decarbonize electricity market as it helps unlock clean
electrification of other sectors (Nguyen et al., 2021; Li et al., 2023;
Naeem et al., 2021d). Specifically, among the major actions taken by
policymakers are the financing, development, and investment in sus­
tainable projects such as clean energy (Iqbal et al., 2022; Naeem et al.,
2020; Naeem et al., 2021a, 2021b,c,d; Mensi et al., 2022; Naeem et al.,
2022; Mirza et al., 2023; Yousaf et al., 2022a; Arfaoui et al., 2023a; Su
et al., 2023; Umar et al., 2022a, 2022b). In this context, Zhang et al.
(2023) unveil that the adoption of clean energy technologies allows
reducing the level of carbon emissions and could stimulate the devel­
opment of electricity industry sector such as wind and solar generation,
electric vehicles. Furthermore, the establishment of carbon market such
as European Union Emission Trading Scheme (EU ETS) which seeks to
reduce greenhouse gas emission in high-intensity carbon-emitting in­
dustries is also an effective tool to reduce the level of carbon emission
worldwide (Yan et al., 2020; Huang et al., 2021). According to Zhu et al.
(2020), carbon market is considered as an effective tool for reducing the
costs of emission abatement by institutional innovation and carbon
market trading. As mentioned earlier, companies operating in electricity
sectors are the largest carbon emitters, leading them to be closely related
to carbon market (Li et al., 2023). With the establishment of emissions
trading system, electricity companies integrated emission prices into
their production costs. Thus, to reduce their exposure to the ETS system,
companies operating in electricity sectors have increased their invest­
ment in green technologies with low-carbon emissions and starting shifts
their attention towards cleaner energies (Tian et al., 2016). Against this
background, it’s important to notice that the interactive development of
electricity and carbon markets allows us to achieve zero-carbon emis­
sions target and to contribute to clean energy development (Pan and
Pan, 2019; Qi et al., 2023).
Over the past decades, financial market including international en­
ergy and clean energy markets have experienced numerous black swans
events following several recent episodes of market tensions such as the
great recession, the Global Financial Crisis (GFC), the European debt
crisis (EDC), the shale oil revolution (SOR), the economic downturn due
to the COVID-19 outbreak and the Russian-Ukrainian war (Mănescu and
Nuño, 2015; Li et al., 2021; Fang and Shao, 2022; Naeem et al., 2023a,b;
Rehman et al., 2023). These black swans’ events have been manifested
in a series of extreme events such as the geopolitical tensions (Hemrit
and Nakhli, 2021), the spectacular rising of electricity, natural gas and
coal prices (Wen and Jia, 2022; Williams and Green, 2022; Yang et al.,
2022), the negative pricing of WTI crude oil markets (Ahonen et al.,
2022), the international sanctions (Steinbach, 2023), climate warming
(Arif et al., 2021; Arif et al., 2022), and the strategies towards transitions
to renewable sources of energy to reduce carbon emissions related to
fossil fuels. Following these episodes, energy markets and especially oil,
gas and electricity markets have faced a huge episode of high volatility
and becomes harder to predict their prices. For instance, Shafiee and
Topal (2010) report that natural gas and coal markets exhibit the highest
volatility trend in the historical of fossil fuel prices during the GFC.
Furthermore, energy prices in general and the electricity market in
particular have been steadily rising since the COVID-19 outbreak
accompanied by a global decline in electricity demand. This situation
4 5
https://transportgeography.org/contents/chapter4/transportation-an
d-energy/world-energy-consumption/
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Energy Economics 127 (2023) 107082
was particularly pronounced during the Russia-Ukraine war amid fears
of disruption of energy supply chains and the strict rising sanctions
against the Russian energy sector. Wholesale electricity prices reached a
record high since the Russia-Ukraine war especially in Europe and USA
(Belaïd et al., 2023; Perdana et al. 2022). The rising electricity prices
and therefore its production cost is mostly attributed to the high prices
of natural gas and coal prices. For instance, according to the EIA report
(2022),5 coal prices reached record levels and exceeded $457 per metric
ton in September 2022. Meanwhile, natural gas prices reached their
maximum and climbing to almost $250 dollars per barrel of oil in 2022.
In the same vein, oil prices rose and reached $100 per barrel in
mid-2022, before falling again. Thus, the drastic rising of energies
required to electricity generation accompanied with the fall in elec­
tricity demand could explain the increase in electricity costs worldwide
(Olabi et al., 2022). Consequently, this situation also created serious
challenges for transition towards clean energy that showing strong
resilience during crises (e.g., COVID-19 crisis) and to ensure energy
security (Belaïd et al., 2023; Mirza et al., 2023). For instance, the Energy
Information Administration (EIA) report that in the USA, the electricity
generated from clean energy sources such as solar, wind, biomass, sur­
passed for the first-time coal-fired generation in 2022. Precisely, com­
bined renewable sources provided about 25% of the total generation of
electric power produced in 2022 compared to 19% in 2020.6 The com­
bination of aforementioned events led to develop an environment
through which dynamic interconnectivity among energy markets such
as electricity, fossil fuels and clean energy has changed significantly.
While large numbers of studies have investigated the association
between electricity market and various financial assets (i.e., conven­
tional, and clean energy assets), to our knowledge the dynamics of tail-
risk spillovers across electricity (i.e., conventional, and alternative
electricity markets), conventional energy (i.e., oil, natural gas), carbon
and clean energy markets, are largely unexplored. To address this gap,
the current study seeks to fill this void in the literature by exploring the
dynamics of tail-risk spillovers across these markets during multiple
recent episodes of financial markets-related distress including the Global
Financial Crisis, the shale oil revolution, the COVID-19 crisis, and the
Russia-Ukraine war.
Tail risk connectedness makes easier the investigation and the
analysis of spillovers resulted from the occurrence of extreme positive or
negative events over time. Specifically, the analysis of tail-risk
connectedness among financial markets appears crucial to allow to
market participants to establish successful hedging strategies and un­
derstanding the reaction of financial markets, notably due to the large
number of extreme events in these markets. Previous studies in the
literature prove that tail spillovers among energy markets (Gong et al.,
2023; Qiao et al., 2023; González-Pedraz et al., 2014) vary between
extreme positive and extreme negative market movements. Interest­
ingly, transmissions of negative chocks are more significant and preva­
lent during the occurrence of extreme negative events especially during
periods of market turmoil (e.g., financial, or economic crises, market
crashes). We also denote that tail risk connectedness gives us an indi­
cation of uncertainty-contagion within a network of variables, as she can
provide useful insights into the transmission of greater exposure to
losses. In this spirit, using a framework that investigate tail risk
connectedness is very useful and important when examining contagious
effects across financial markets and particularly energy markets which
exhibit extreme behaviour during the time of crises (e.g., negative WTI
prices during COVID-19, spectacular rising of electricity prices during
Russia-Ukraine war).
Based on the discussion above, the contribution of the current study
to literature is threefold. First, to the best of our knowledge a lack of
insight is found regarding the tail risk connectedness among electricity,
https://www.iea.org/reports/world-energy-outlook-2022
6
https://www.eia.gov/todayinenergy/detail.php?id=53779
M.A. Naeem and N. Arfaoui
oil, natural gas, carbon emissions and clean energy markets. Notably, we
examine the tail risk connectedness across the considered markets dur­
ing multiple and consecutive recent episodes of financial markets-
related distress. We check the hypothesis suggesting the existence of
increased dynamic interdependence among electricity, conventional
(oil, natural), carbon and clean energy markets. The increased tail-risk
spillovers reveal that exposure to losses in one market can easily spill
over to other markets (Ahmed et al., 2022). Second, the majority of
existing studies in the field examined the connectedness across markets
usually during a specific crisis period. Nevertheless, in the current work
we separately consider episodes of financial markets-related distress
such as the Global financial crisis, the Shale Oil Revolution, COVID-19
period and the Russian invasion of Ukraine that proved disastrous for
the energy market, to explore whether the connectedness pattern
changes during these periods of market tensions. Third, methodologi­
cally, while several studies in the literature investigate the risk spillover
across financial markets during time of crisis using sophistical econo­
metric techniques such as TVP-VAR (Akhtaruzzaman et al., 2022a) and
Conditional Value-at-Risk (CoVaR) (Akhtaruzzaman et al., 2022b;
Akhtaruzzaman et al., 2022c; Tiwari et al., 2020),the current study
employs a combination of the Conditional Autoregressive Value-at-Risk
(CAViaR) based on the asymmetric slope and the Time-Varying
Parameter Vector Autoregressive (TVP-VAR) connectedness approach
of Antonakakis et al. (2020) to study tail-risk spillovers across the
considered markets. Specifically, these two techniques present several
advantages. Starting with the CAViaR method, the main advantage of
this technique compared to traditional VaR-based methods used in
finance is that a direct distribution-free approach. Specifically, this
approach is based on the fact that it’s more interesting to model the
quantile directly as it evolves through time instead of modeling and
estimating the entire distribution of returns. Thus, by modeling the
quantile, we are not obliged to adopt the set of extreme assumptions
adopted by alternative methodologies such as the assumption suggesting
that returns are i.i.d. normally distributed. Moreover, another inter­
esting reason for adopting the CAViaR model is that Manganelli and
Robert (2004) proved, using Monte Carlo simulation, that it out-
performs the majority of indirect VaR techniques when returns whose
distribution exhibit a fat-tail distribution. We notice also that the CAViar
technique unveils asymmetric trends at 5% VaR by showcasing various
asymmetric and nonlinear trends in the data. Regarding the TVP-VAR
model, the adoption of this technique presents numerous computa­
tional advantages such as the applicability of low-frequency data, the
insensitivity to outliers, and the choice of the rolling window (Akhtar­
uzzaman et al., 2022a).
Results show the presence of strong intra-class clusters among elec­
tricity and clean energy markets during crises periods. Specifically, the
connectedness across the examined markets intensified especially dur­
ing the GFC and the COVID-19 outbreak. We also found that carbon and
conventional energy can provide diversification benefit to a portfolio
including electricity and clean energy assets. Results also disclose that
crude oil market acts as net receiver of shocks whereas; alternative
electricity market appears as net risk transmitter of shocks mostly. We
also found that natural gas, conventional electricity, carbon, and clean
energy show heterogeneous behaviors as they switch between spillover
receiver and transmitter, with carbon market acting mainly as spillover
receiver.
The remainder of the paper is orchestrated as follows: Section 2 re­
ports a review of the related literature. Section 3 introduces the meth­
odological approach and the data. Section 4 reports and discusses the
main empirical findings. Finally, section 5 concludes.
2. Literature review
Extensive research surrounding the energy market has been under­
taken in the existing literature (e.g., Wei et al., 2023; Lau et al., 2023).
Specifically, over the last decades and especially during crises periods,
3
Energy Economics 127 (2023) 107082
the electricity market has become of great interest for policy makers,
governments and investors in financial market. In this spirit, the liter­
ature on the electricity market can be partitioned into three strands. The
first strand of studies assesses the connectedness among electricity and
fossil-fuel markets. The second strand is inquiring into the relationship
between electricity and carbon markets. The last strand of studies fo­
cuses on the electricity-clean energy nexus.
The first strand of studies is related electricity market on fossil fuel
commodities. For instance, Liu et al. (2020) unveil through a
time-frequency domain frameworks that natural gas, coal and oil exhibit
the strongest spillover effect on electricity market. Further, they argue
that return (volatility) spillover is mostly transmitted from fossil fuel
commodity markets to electricity markets in the short term (long term).
Results also show that the dynamic volatility spillovers are sensitive to
“Black Swan” events. Nakajima and Toyoshima (2020) show the exis­
tence of shock transmissions from spot (futures) natural gas to spot
(futures) electricity markets. More recently, Scarcioffolo (2021) assess
the spillover effect across energy markets for the period ranging from
November 24, 2003, to August 12, 2019. Results report spillover effects
from crude oil to natural gas especially at the lower quantiles. Moreover,
they reveal the presence of bi-directional spillover between electricity
and natural gas especially around the median and upper quantiles. Xia
et al. (2020) assess the non-linear causality and the dependence between
electricity and fossil fuel markets (i.e., oil, gas, coal, and uranium).
Findings show the existence of non-linear causality between electricity
and fossil fuel markets for most timescales. Results of the connectedness
analysis reveal the existence of positive and weak connectedness from
oil and uranium to electricity markets. They also find a bidirectional
spillover between the electricity and gas/coal markets across horizons.
The authors also report a strong information transmission from the gas
to electricity markets. Furio and Chulia (2012) document the presence of
spillover effect from oil/natural gas markets to the future electricity
market in Spain. Frydenberg et al. (2014) report a significant cointe­
gration relationship between the European (German, Nordic, and the
UK) electricity futures market and fuel source markets (oil, gas, coal). To
be precise, the authors find the existence of combination between Nordic
(UK) electricity prices and coal (gas and coal). Muhammadi (2009) in­
vestigates the long/short-run dynamics between electricity prices and
fossil fuel commodities (oil, coal, natural gas) for the USA market be­
tween 1960 and 2007. Findings reveal the presence of a significant
long-run relationship between electricity and coal prices. Moreover, in
the short run they report a unidirectional causality from natural gas/coal
prices to electricity prices. Uribe et al. (2022) examine the transmission
of natural gas shocks to electricity prices during periods of market ten­
sions. Findings reveal that Denmark and Finland electricity markets are
the most sensitive to natural gas price shocks. Nevertheless, Portugal
and Spain electricity markets are the most resilient to gas shocks during
distress episodes.
The second strand of studies has recently gained significant attention
in literature, especially with the rising environmental concerns. Specif­
ically, these studies have focused on the interrelationship between
electricity and carbon market. For instance, Zhu et al. (2017) unveil the
presence of unidirectional relationship from the electricity market to the
carbon market. This finding varies across timescales. Specifically, the
authors report that for mid-and long-timescales, bidirectional causality
between carbon and electricity markets is found for most cases. They
also find that at short timescales the causalities between the considered
market are still bidirectional. Later, Zhu et al. (2020) investigate the risk
spillover effect between carbon and electricity markets over the period
ranging from April 22, 2005, to December 29, 2017. Results show that
the connectedness between carbon and electricity markets changes
across frequencies (high, intermediate, and low). Under high and low
frequency, the authors report a positive (negative) spillover effects from
carbon (electricity) market to electricity (carbon) market. Findings of
the analysis also reveal the existence of negative spillover effects be­
tween carbon and electricity markets in the form of a feedback
M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

mechanism, under intermediate frequency modes. Cao and Xu (2016) 3. Methodology

argue the presence of bidirectional causality between carbon and elec­
tricity prices in future markets. They also prove that a rise in carbon
price is associated with a rise in energy price (oil, natural gas, elec­
tricity). Balcilar et al. (2016) find through the combination of Markov
Switching and DCC GARCH models the presence of time-varying risk
spillover from energy (electricity, coal, natural gas) to carbon markets.
They also argue that carbon market shows volatile hedging effectiveness
against energy markets. More recently, Qiao et al. (2023) reveal the
presence of time-varying spillovers among carbon, fossil energy and
electricity markets. They also show that the spillover effects are main­
tained at three months and decrease when time is lags for one month. A
3.1. Conditional autoregressive value at risk (CAViaR)
In the current study we employ the asymmetric slope Value-at-Risk
(CAViaR) approach developed by Engle and Manganelli (2004). This
technique is the most relevant option for the slope CAViaR approach
because she takes into consideration the asymmetric effects. Specif­
ically, the VaR of a certain quantile in the asymmetric slope CAViaR
model follows an autoregressive process which is demonstrated as:
fα,t (β) = β0 + β1 fα,t− 1 (β) + β2 x+ −
t− 1 + β3 xt− (1)
1

recent study by Zhao et al. (2023) documents a strong interdependent

relationship across China’s carbon, coal, and electricity markets. They
also find that Carbon-Coal-Electricity system could lead the develop­
ment of China’s economy. Daskalakis and Markellos (2009) report the
existence of positive and significant link between carbon emission spot
returns and electricity market within the European Union Emission
Trading Scheme (EU ETS).
Dealing our attention now to the third strand of studies. Although
electricity market and clean energy are closely linked, recently few
emerging studies in the literature have scrutinized the link between
these two markets. Reboredo and Ugolini (2018) reveal that the elec­
tricity market is a major contributor to the clean energy market in
Europe and USA. The study by Naeem et al. (2020) report time-varying
connectedness across electricity, oil, and clean energy markets that
persist especially during crises time. Recently, Zhang et al. (2023)
employ a quantile-based method to assess the spillover effects among
markets. Findings unveil higher (moderate) connectedness among the
considered markets, i.e., clean energy, electricity, and energy metals,
under extreme market conditions. The authors also reveal that the
connectedness among the examined markets is time-varying and more
pronounced during the occurrence of extreme events. Maciejowska
(2020) utilizes a quantile regression technique to investigate the effect
of clean energy sources (wind and solar photo voltaic) on German
electricity prices. Findings show that both types of clean energy exhibit a
significant negative impact on German electricity spot prices around the
median. When distinguishing between the different types of clean en­
ergy sources considered in this study, the author documents that solar
(wind) has the higher reducing impact on upper (lower) quantiles of
electricity price distribution. Another study by Ahmed et al. (2021)
where fα,t denotes the VaR at the 5% quantile level during period t, β0 is
the constant, β1 and fα,t− 1 represent the weights for the lagged values and
the lagged terms for the VaRs, respectively. Furthermore, β2 and
β3 illustrate the positive and negative return on VaR, respectively.x+
t− 1
and x−t− 1 denotes the parameters of β2 and β3 , respectively.
3.2. TVP-VAR based connectedness approach
In order to retrieve information for the risk transmission mechanism
across the considered markets in the current study, we employ the
CAViaR changes as the basis for the TVP-VAR connectedness method.
More precisely, we employ the Bayesian information criterion (BIC) to
estimate the TVP-VAR model which can be written as given:
yt = Bt yt− 1 + ϵt ϵt ∼ (0, St ) (2)
Vec(Bt ) = Vec(Bt− 1 ) + vt vt ∼ (0, Rt ) (3)
where yt and yt− 1 denote k × 1 dimensional vectors, representing all tail
risk series in period t, t–1. ϵt is the error term vectors. Bt and St are k × k
dimensional time-varying matrices and the time-varying variance-
covariance matrices, respectively. Nevertheless, vec (βt ) and vt represent
the dimensional vectors at k2 × 1 and Rt denotes the dimensional matrix
at k2 × K2.
Then, the TVP-VAR model is converted into TVP-VMA model using
the following equation:
∑
P ∑
∞
yt = Bit yt− i + ϵt = Ajt ϵt− (4)
i=1 j=0
j

explores the role of clean energy consumption on electricity consump­

tion in Australia. Using autoregressive distributed lag (ARDL) model, the Where denotes k × k dimensional time varying VMA coefficient
authors show that an increase in clean energy consumption is associated matrix. The (scaled) generalized forecast error variance decomposition
with an increase in electricity consumption in the short/long-run. ‘GFEVD’ normalizes the (unscaled) GFEVD Ψ gij,t (H) where each row sums
As mentioned earlier analysis of tail risk connectedness makes easier up to unity. Hence, Ψ ̃ g (H) indicates the influence variable jexerts on
ij,t
the investigation and the analysis of spillovers stemming from the variable i in forecast error variance. This indicator represents the pair­
occurrence of extreme positive or negative events over time. We notice wise directional connectedness from j to i and is calculated as follows:
also that tail risk connectedness gives us an idea on uncertainty-
∑H− 1 ( ′ )
contagion within a network of variables, as it allows to capture the − 1
Sii,t t=1 τi At St τj 2
Ψ gij,t (H) = (5)
transmission of greater exposure to losses. In this spirit, adopting a ∑k H− ∑1
network that allows to assess tail risk connectedness appears very useful j=1 ( τ i A t S t A′t τi )
t=1
and interesting when investigating contagious effects across financial
markets. In the light of discussion above, it is important to mention that Ψ g (H)
none of the previous studies in the literature explored the dynamics of
̃ g (H) = ∑ ij,t
Ψ ij,t k g
(6)
j=1 ϕij,t (H)
tail-risk spillovers among electricity, fossil fuel commodities, and carbon
̃g ̃g
∑k ∑k
and clean energy markets during numerous episodes of rare events With, j=1 Ψ ij,t (H)=1, ij,t=1 Ψ ij,t (H) = K, τi stands for a selection
especially the Global Financial Crisis, Shale Oil Revolution, COVID-19 vector with unity on the ith position and zero otherwise.
Crisis, and the ongoing Russia-Ukraine war. Specifically, we adopt a The connectedness measures are derived based on the GFEVD.
sophisticate econometric approach that combine the asymmetric slope Firstly, we focus on the total directional connectedness TO others, which
CAViaR and the TVP-VAR model to suitably assess the tail-risk illustrates the aggregating shock that variable i transmitted to other
connectedness across the considered markets in the current study dur­ variables such as j:
ing multiple recent episodes of financial markets-related distress.
∑
k
g
Ci→j,t (H) = ̃ g (H)
Ψ ij,t (7)
j=1,i∕
=j

4
M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Secondly, we compute FROM others, which represents the shock that August 2005 to 25 May 2023. This period covers important tension
variable i receive from other variables such as j and which is computed episodes: the global financial crisis (GFC) from 2 July 2007 to 30 June
as given: 2009), the shale oil revolution (SOR) from 1 January 2014 to 30
December 2016, the COVID-19 outbreak from 11 March 2020 to 10
∑
k
g
Ci←j,t (H) = ̃ g (H)
Ψ (8) March 2021, the ongoing Russian Ukrainian war from 24 February
ij,t
j=1,i∕
=j 2022. Log transformation returns are used for empirical analyses.
Table 1 illustrates the descriptive statistics of the selected variables
Then, by subtracting Eq. (7) from Eq. (8) we obtain the NET total
considered in the current study. Results indicate that all tail risk changes
directional connectedness which allows us to identify whether the var­
exhibit positive average returns except for the alternative electricity
iable is a net transmitter or a net receiver of shocks.
index, global clean energy index and carbon market. Specifically, WTI
g
Ci,t g
(H) = Ci→j,t g
(H) − Ci←j,t (H) (9) crude oil shows the highest average return, whereas carbon market
yields the lowest average return. We found also that the carbon market is
Finally, we compute the total connectedness (TCI) which range be­ riskier than other assets, as she yields the highest volatility, whereas
tween [0,1] as given: conventional electricity index exhibits the most stable return. Moreover,
∑
k
Ψ̃ g (H) ∑k ̃ g (H)
Ψ we found that all series are left skewed, except for crude oil and natural
(10) gas futures markets. Meanwhile, all series are leptokurtic and the
ij,t ij,t
Ctg (H) = ∑k g =
̃ K
j,i=1,i∕
=j j,i=1 Ψ ij,t (H) j,i=1,i∕
=j Jarque-Bera test proved the non-normality of the distribution returns at
The TCI reflects the degree of interconnectedness between variable i the 1% of significance level. Results of unit root test (ERS) based on the
and j. To enhance the interpretability of this measure, the TCI is adjusted Stock et al. (1996), show that all series are stationary at the 1% level.
as given: According to the Q-stat values, evidence of non-randomness at lag 20 is
reported in almost all variables considered in the current study.
∑k
Table 2 displays the Kendall rank correlations among the variables
g
K =j Ψ ij,t (H)
(11)
i,j=1,i∕
Ctg =
K− 1 k included in the study. Results show the presence of significant positive
∑k unconditional correlation across the majority of variables. More pre­
cisely, the highest significant pairwise correlation is found between
g
=j Ψ ij,t (H)
(12)
i,j=1,i∕
0 ≤ Ctg (H) ≤ 1
k− 1 CNVE-ALTE followed by ALTE- SPGCLE and SPGCLE-CNVE. This
empirical evidence indicates the presence of weak hedging and diver­
We further present the pairwise connectedness index (PCI) which is
sification opportunities for international investors aiming to reduce the
derived from the TCI. This index illustrates the interdependence be­
level of their portfolios’ risk. Meanwhile, the lowest significant pairwise
tween market i and market j and is formulated as follows:
⎛ correlation is reported between CRUDOIL-NATG followed by EEXEUAS-
̃ g (H)
Ψ ALTE. This finding affirms the presence of weak interdependency be­
g
Ci,jt (H) = 2⎝Ψ̃ g (H) + g ji,t
tween these markets. Further, this evidence proves the effectiveness of
ij,t
̃ (H) + Ψ
Ψ ̃ g (H) + Ψ
̃ g (H) + Ψ̃ g (H) 0 ≤ Cijt
g
(H) ≤ 1
ii,t ij,t ji,t jj,t
combining these assets by investors seeking for diversification and
(13) hedging opportunities. Results reported in Table 2 also show no signif­
icant correlation between CNVE-NATG; ALTE-NATG and NATG-
3.3. Data and preliminary analysis SPGCLE, suggesting the presence of weak connectedness between
these markets. Such finding reveals that natural gas market can best
In the current work, we explore the tail risk dependence among diversify investments related especially to conventional electricity,
electricity, fossil fuel (oil, natural gas), carbon and clean energy markets alternative electricity, and global clean energy markets.
during several episodes of market crises. We employ daily prices of six
assets for the period ranging from 5 August 2005 to 25 May 2023. 4. Empirical results
Specifically, the data period chosen in the current work includes the
most recent and severe episodes of crises that have faced the financial 4.1. Tail risk
markets (i.e., Global Financial Crisis, Shale oil revolution, COVID-19
outbreak and the Russian-Ukrainian war). All data are retrieved from Fig. 1 depicts the 5% VaR tail risks (value-at-risk for 5% quantile).
Refinitiv DataStream as follows: (a) for electricity market, we employ This figure gives us an idea on the co-movements among electricity,
the conventional electricity index (CNVE) and the alternative Electricity carbon, and clean energy markets. At first glance, we report distin­
Index (ALTE); (b) for carbon market, we consider the spot price of guished pattern across the selected markets considered in this study.
emissions allowances (EUA) traded on the European Energy Exchange Such finding reveals that these markets exhibit diversification benefits
(EEX); and (C) for fossil fuel commodities, we use WTI crude oil future for portfolio managers (Naeem et al., 2020). From this figure we see that
price (CRUDOIL) and natural gas future price (NATG). Last, we consider carbon emission and natural gas markets appear as the riskiest as they
the S&P global clean energy index (SPGCLE) as a proxy for the clean exhibit the highest spikes. Specifically, the value of 5% VaR based on the
energy market. This dataset comprises electricity, fossil fuels (natural Asymmetric-slope CaViaR model reaches its maximum for carbon mar­
gas, oil), carbon and clean energy prices over the period ranging from 5 ket between 2005 and 2008 with almost 58% in 2007. This finding

Table 1
Summary statistics of market returns.
Market Abbreviation Mean Variance Skewness Ex. Kurtosis JB ERS Q(10) Q2(10)

Conventional Electricity Index CNVE 0.006 0.807*** − 0.759*** 18.599*** 67,398.814*** − 8.968*** 37.547*** 2894.103***
Alternative Electricity Index ALTE − 0.002 1.320*** − 1.025*** 13.737*** 37,333.968*** − 12.464*** 68.956*** 2612.130***
EEX-EU CO2 Emissions E/EUA EEXEUAS − 0.11 25.427*** − 0.538*** 29.710*** 171,056.822*** − 11.867*** 106.323*** 2619.900***
Crude Oil WTI Future CRUDOIL 0.019 7.379*** 0.506*** 18.885*** 69,225.153*** − 17.773*** 15.228*** 1792.579***
Natural Gas Future NATG 0.017 9.293*** 0.479*** 88.768*** 1,525,249.302*** − 26.712*** 46.900*** 1.132
S&P Global Clean Energy Index SPGCLE − 0.004 3.468*** − 0.509*** 11.820*** 27,240.093*** − 24.961*** 99.839*** 2697.908***

Notes: ***, **, * denote significance at 1%, 5% and 10% significance level; Skewness: D’Agostino (1970) test; Kurtosis: Anscombe and Glynn (1983) test; JB: Jarque
and Bera (1980) normality test; and ERS: Stock et al. (1996) unit-root test.

5
M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Table 2
Kendall rank correlation.
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE

CNVE 1.000*** 0.491*** 0.062*** 0.161*** − 0.008 0.421***

ALTE 0.491*** 1.000*** 0.059*** 0.181*** 0 0.471***
EEXEUAS 0.062*** 0.059*** 1.000*** 0.096*** 0.074*** 0.066***
CRUDOIL 0.161*** 0.181*** 0.096*** 1.000*** 0.022** 0.184***
NATG − 0.008 0 0.074*** 0.022** 1.000*** 0.017
SPGCLE 0.421*** 0.471*** 0.066*** 0.184*** 0.017 1.000***

Note: This table estimates the Kendall rank correlation among the selected markets.

Fig. 1. Downside risk of markets.

Notes: This figure represent the 5% VaR using the asymmetric slope (AS)CAViaR model.

reveals that carbon market is unable to provide suitable hedge advan­
tage for international investors during periods of market turmoil. The
evolving nature of carbon market newel launched in 2005 and the rising
attention to this market as an interesting investment avenue towards
low-carbon economy made the market attractive especially for traders
and firms with higher CO2 emissions. In other terms, the rising of
popularity and trading on carbon market since their creation to move
the global economy away from a high emissions trajectory, could
explain the high volatile behaviour of this market recorded between
2005 and 2008. Results also show that natural gas market recorded a
rising in volatility between 2005 and 2009 with almost 30% before
jumping to 5% after the Global Financial Crisis (GFC). The high spike of
natural gas between 2005 and 2009 could be attributed to supply dis­
ruptions of natural gas caused by hurricanes Katrina and Rita in 2005,
and hurricanes Gustav and Ikethe in 2008, which caused drastic increase
in natural gas prices (Hailemariam and Smyth, 2019). Afterwards, since
2020, volatility of natural gas prices increased dramatically and reaches
its maximum during the first quarter of 2022 which coincide with
Russia-Ukraine war. Specifically, Russia-Ukraine war leads to unprece­
dented turmoil in international gas market with supply restrictions, in­
ternational sanction packages contributing to record wholesale prices
and significant volatility (Yagi and Managi, 2023). VaR values for crude
oil reach a spikes level during the GFC and the COVID-19 outbreak and
remain more or less stable during the rest of periods. Specifically,
volatility of the oil market increased drastically during the GFC where
oil prices reach record levels never seen before (Ji and Guo, 2015).
During this crisis, the world’s demand for oil increased into unprece­
dented level, yet petroleum companies have withdrawn their in­
vestments in big, long-life projects following a period of low prices.
Production problems and geopolitical tensions cut and limit the output
in some OPEC countries. Oil market has recorded remarkable changes
since 2008, and some of those transformations lead to reduce the cost of
crude. Consequently, all these factors lead to increase the level of
volatility on crude oil market. Moreover, the high level of oil market
volatility recorded during the last health crisis could be mostly the result
of dramatic collapse of oil prices which reaches negative pricing for WTI
crude oil markets and the geopolitical tensions between Russia and
Saudi Arabia regarding quota production agreements (Arfaoui et al.,
2023b). Finally, it is important to mention that the values of VaR for the
rest of considered markets in this study (i.e., electricity, alternative
electricity, and clean energy markets) increase slightly during episodes
of market turmoil without exceeding a VaR value of 8% in almost cases.
This empirical finding could be attributed to the behaviour of investors
on electricity, alternative electricity, and clean energy markets during
crises time. Specifically, during periods of crises, investors are exposed
to an unusually high volume of dramatic and unexpected news. Thus,
receiving such an important volume of information in short time could
lead to status-quo bias which might in turn reduce investors’ trading

6
M.A. Naeem and N. Arfaoui
activity during crisis period (Hoffmann et al., 2013).
4.2. Tail connectedness network
Fig. 2(a) illustrates the tail-risk spillover network of pairwise direc­
tional connectedness among all the studied markets for the full sample.
At first glance, the network shows that each of the markets received and
transmitted tail-risk spillover from and to the other markets, although
some markets appear strongly connected between them, than others.
Results reveal a fairly strong connectedness between electricity and
clean energy markets. This empirical evidence is in line with the findings
reported by Reboredo and Ugolini (2018). Precisely, our findings show
that the strongest connectedness is reported between CNVE-ALTE,
SPGLE-ALTE and CNVE-SPGLE, where each relationship is in the form
of a feedback mechanism. Such findings affirm the strong interdepen­
dency between these markets, which is mostly due to the fact that with
the rising of climate and environmental issues, electricity market starts
undergoing a significant transition towards clean energy and carbon-
free energy sources to alleviate carbon emissions coming from elec­
tricity generation and achieve the global target of net-zero emissions by
2050 (Wainstein and Bumpus, 2016; Zhang et al., 2023). For instance,
according to the EIA (2021), electricity generation from renewable
sources reached its maximum during 2021 with 795 million mega­
watthours (MWh) in the United States during 2021.7 Nevertheless, the
weakest connectedness is found among carbon and conventional energy
market. Such finding corroborates the study by Tan et al. (2020) which
reveal the presence of weak dependency between carbon market and
fossil fuel commodities. This surprising finding could be due to the fact
that during periods of market turmoil, it’s difficult for investors to form
expectations of future returns and potential spillovers. Consequently,
resulting in possible non-rational investment behaviour, we also notice a
weak connectedness of carbon/conventional energy with electricity and
clean energy markets. This finding supposes that carbon and conven­
tional energy assets provide diversification benefits in a portfolio
including electricity and clean energy assets.
When shifting our attention to the GFC, results depicted in Fig. 2(b)
are in line with our primary results reported in the full sample. Results
reveal that the tail-risk spillover across the examined markets in this
study are maintained and strengthened in most cases. Intuitively, we
found that the strongest (weakest) connectedness is found across elec­
tricity and clean energy markets (carbon and conventional energy
markets). The rising of connectedness size across those markets during
the Global Financial Crisis provides evidence that supports the idea
suggesting that the connectedness exhibited significant increase during
the periods of market turmoil. The rising of connectedness across these
markets during the GFC corroborate the finding of Naeem et al. (2020),
which reports in their study that the connectedness across electricity,
and clean energy markets increase and persist especially during crises
time. Nevertheless, tail-risk analysis shows a slight drop in the size of
connectedness between ALTE and crude oil market. It is also important
to mention that conventional energy and carbon markets still serve as an
effective hedging tool during periods of market tensions. It is also
important to mention the presence of bidirectional weak connectedness
between CRUDOIL and NATGAS. This empirical evidence is consistent
with the study by Yousaf et al. (2022b) which report weak interdepen­
dence between natural gas and oil market during crisis periods.
When focusing on the shale oil revolution, results illustrated in Fig. 3
(c) report similar patterns compared to the Global Financial Crisis
(GFC), where conventional energy and carbon markets serve as an
effective hedgers against electricity and clean energy assets during the
shale oil revolution. This empirical evidence is partially in line with the
study by Balcilar et al. (2016) which reveal that carbon market is
considered as an effective hedgers against energy markets including
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Energy Economics 127 (2023) 107082
electricity. Notably, we found that the strongest connectedness is
maintained among conventional electricity, alternative electricity and
clean energy but weakened compared to the Global Financial Crisis,
especially between conventional electricity and clean energy markets.
The drop of connectedness size between conventional electricity and
clean energy markets is mostly attributed to the fact that by joining shale
oil revolution, USA and other countries across the globe abandoned the
green energy revolution. Specifically, the technological advances
accompanied the shale oil revolution led to a reduction in the cost of
accessing shale oil and gas. The sharp increase in US shale oil production
and the drop in its production cost drastically reduce oil prices. Conse­
quently, cheaper oil reduces overall electricity prices and therefore in­
creases the quantity of electricity demanded. Thus, low oil cost and
prices can further lead economies to massively exploit fossil fuels com­
modities instead of clean energy sources to ensure electricity generation.
From Fig. 2(d), we see some different patterns during the COVID-19
outbreak compared to the global financial crisis and the shale oil revo­
lution. From this figure we found that the connectedness among the
examined markets strengthened among the considered markets in this
study as the edge between them becomes thin. Clean and electricity
assets are strongly connected to form a strong cluster where each market
appears at the same time as a risk transmitter and receiver as well. Such
finding is in line with the study by Zhang et al. (2023) which indicate
that the connectedness across electricity, clean energy is more pro­
nounced during the occurrence of extreme events such as the COVID-19.
The strengthens of connectedness between clean and electricity markets
could be because the last health crisis, Covid-19 lockdown measures
have reduced the level of electricity demand by 10–35%, leading to
increase the overall share of clean energy demand (EIA, 2020).8 More­
over, we see that the connectedness between clean energy and crude oil,
and alternative electricity and crude oil increased during the COVID-19
outbreak compared to the Global Financial Crisis and the Shale oil
revolution. The rising of connectedness between clean energy and crude
oil could be due mainly to the increasing relevance of alternative and
renewable energy sources instead of fossil fuels and the sharp declining
of oil price which record negative value for first time in history during
the COVID-19. Regarding the connectedness between alternative elec­
tricity and crude oil markets, the rising of renewable power demand
during COVID-19 crisis hasten the transition away from fossil fuels and
increase in turn electricity generation from renewable energy sources.
For instance, electricity generation coming from renewable energy
sources increased by 5% from 2020 to 2021 (EIA, 2021).9
When shifting our attention on the post Russia-Ukrainian war, results
depicted in Fig. 2(e) report the same patterns compared to the COVID-19
outbreak with a drop in the connectedness among the majority of
markets considered in this study. Interestingly, we found that the
connectedness among all markets is weakened, except for the bidirec­
tional relationship between clean energy and alternative electricity
markets which strengthened during Russia Ukrainian war. The financial
and economic disruption caused by the recent energy crisis during the
ongoing Russian-Ukrainian war has accelerated the world’s shift to­
wards clean energy sources and low-carbon power to replace Russian
energy (Karkowska and Urjasz, 2023). Specifically, this war caused a
sharp increase in hydrocarbon prices due to the western sanctions and
boycotts targeting Russian hydrocarbons. On March 8, the United States
has banned all imports of oil and gas from Russia. A month later, the
European Union banned also Russian coal. Consequently, oil prices
increased drastically from above $70 USD per barrel in January 2022 to
$122 USD in July 2022. Furthermore, natural gas surged from about $4
USD per million BTU in January 2022 to almost $10 USD in August
2022. Fossil fuels bans and the sharp surge in their prices worldwide has
propelled world to shift towards solar, wind and other renewable energy
8
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https://www.iea.org/
M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Fig. 2. Network spillovers of downside risk.

a) Full sample.
b) Global Financial Crisis.
c) Shale Oil Revolution.
d) COVID-19 Crisis.
e) Post Russia-Ukraine Conflict.
Note: This figure showcases the Network spillovers of downside risk electricity, conventional, and clean energy markets using a TVP-VAR model with lag 1 (SIC
criteria) and a 10-step-ahead generalized forecast error variance decomposition.

8
M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Fig. 2. (continued).

sources. In this regard, the EIA (202210) reports that higher fossil fuel
prices have stimulate the competitiveness of wind and solar photovol­
taics generation against other fossil fuel commodities. It is also impor­
tant to mention that this war stimulates the shift from electricity
generation using fossil fuels to clean sources. According to Global
Electricity Review (2023),11 clean energy sources accounted for over
90% of new electricity demand in 2022 which is mostly the results of oil
and gas supply crisis in the wake of the Russian Ukrainian war. We also
notice that the bahaviour of carbon and conventional energy have not
changed during the Russian invasion of Ukraine compared to the pre­
vious crises. This evidence affirms that these markets provide effective
hedge and safe havens benefits against clean and electricity markets. In
addition, we found that the strongest drop in the tail-risk connectedness
Fig. 3. Time-varying TOTAL downside risk transmission of markets.
is shown between alternative electricity and crude oil market.
Notes: Results are based on a TVP-VAR model with lag 1 (SIC) and a 10-step-
ahead generalized forecast error variance decomposition. Black line repre­
sents the 5% VaR, while the red(dashed) and the green (dotted) lines represent
4.3. Averaged pairwise connectedness
the results of the 10% and 2.5% VaR, respectively. (For interpretation of the
references to colour in this figure legend, the reader is referred to the web
version of this article.)
Table 3 illustrates the averaged pairwise spillover results. From this
table we see that all diagonal elements are equal to 1. Panel A of Table 1
shows that the strongest co-movements appear between CNVE-ALTE

10
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11
file:///C:/Users/stef%20info/Downloads/Global-Electricity-Review-2023%
20(1).pdf

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M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Table 3 followed by SPGCLE-ALTE (39.66%) and CNVE-SPGCLE (24.48%).

Average pairwise spillover table. Nevertheless, we found a slight change regarding the lowest pairwise
a) Full Sample market connectedness compared to previous results. Interestingly, the
weakest average pairwise connectedness is recorded between ALTE-
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE
NATGAS (2.04%) and NATG-SPGCLE (1.57%). It is also important to
CNVE 100 45.93 3.14 11.01 1.98 35.5 mention a drop in the co-movement across the majority of market pairs
ALTE 45.93 100 4.32 12.78 1.99 43.44
EEXEUAS 3.14 4.32 100 5.19 1.94 3.88
compared to the Global Financial Crisis. Such findings reveal that the
CRUDOIL 11.01 12.78 5.19 100 1.47 13.33 shale oil revolution boom exerted less pronounced effect on market co-
NATG 1.98 1.99 1.94 1.47 100 2.03 movement than the Global financial crisis. This is mostly attributed to
SPGCLE 35.5 43.44 3.88 13.33 2.03 100 the behaviour of investors who consider the USA during this flourishing
period as independent of oil imports, owner cheap gasoline and tech­
b) Global Financial Crisis nological advance in oil and natural gas production. Such a situation
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE could increase the level of investors’ confidence and in turn reduce the
CNVE 100 54.45 1.05 7.2 2.28 46.2
ALTE 54.45 100 3.05 9.8 2.3 52.49
dependency across markets.
EEXEUAS 1.05 3.05 100 7.19 2.28 5.3 Regarding the COVID-19 outbreak period, results seen in Panel d of
CRUDOIL 7.2 9.8 7.19 100 1.65 15.32 Table 3 are mostly consistent with previous crises periods as CNVE-ALTE
NATG 2.28 2.3 2.28 1.65 100 2.96 (54.95%), SPGCLE-ALTE (48.65%), and CNVE-SPGCLE (37.6%) still
SPGCLE 46.2 52.49 5.3 15.32 2.96 100
shown the strongest co-movement. Moreover, we see that the size of
pairwise market co-movement increase for almost all markets during the
c) Shale Oil Revolution recent health crisis compared to the shale oil revolution. This empirical
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE
finding underlines the severity of the COVID-19 crisis on the financial
CNVE 100 48.25 4.44 6.89 2.52 24.48
ALTE 48.25 100 7.29 10.23 2.04 39.66 market which increases the uncertainty to unprecedented levels.
EEXEUAS 4.44 7.29 100 5.46 2.54 5.73 Consequently, such situations increase the sensitivity of markets and the
CRUDOIL 6.89 10.23 5.46 100 1.87 9.57 connectedness across them (Jebabli et al., 2022). We disclose a slight
NATG 2.52 2.04 2.54 1.87 100 1.57
change regarding the weakest co-movement between market pairs
SPGCLE 24.48 39.66 5.73 9.57 1.57 100
compared to previous crisis periods. Specifically, we note that the
weakest average pairwise connectedness appears between CNVE-NATG
d) COVID-19 Crisis
(0.96%), followed by ALTE-NATG (1%) and CRUDOIL-NATG (1.33).
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE
CNVE 100 54.95 11.04 16.09 0.96 37.6 This empirical finding affirms the effectiveness of combining these assets
ALTE 54.95 100 13.21 19.53 1 48.65 in the same portfolio as they provide for portfolio managers and inter­
EEXEUAS 11.04 13.21 100 8.35 1.56 11.65 national investor’s diversification benefits.
CRUDOIL 16.09 19.53 8.35 100 1.33 19.74 When moving our attention to the Post Russia Ukraine conflict, we
NATG 0.96 1 1.56 1.33 100 0.41
SPGCLE 37.6 48.65 11.65 19.74 0.41 100
report that the behaviour of markets does not change much compared to
previous crisis periods. Interestingly, from Panel e of Table 3 we see that
SPGCLE-ALTE shown the strongest average pairwise connectedness with
e) Post Russia Ukraine Conflict
CNVE ALTE EEXEUAS CRUDOIL NATG SPGCLE almost 47%. This finding indicates that governments and investors shift
CNVE 100 39.21 3.56 3.12 0.86 29.83 their attention towards alternative energy and especially clean energy
ALTE 39.21 100 1.86 4.99 1.92 46.91 (solar, wind) to substitute fossil fuel that record historical prices levels
EEXEUAS 3.56 1.86 100 4.7 1.51 2.4 during this war. Furthermore, we notice that CNVE-ALTE, and CNVE-
CRUDOIL 3.12 4.99 4.7 100 0.96 2.37
NATG 0.86 1.92 1.51 0.96 100 3.01
SPGCLE shown also stronger co-movement during the Russian Ukrai­
SPGCLE 29.83 46.91 2.4 2.37 3.01 100 nian war with 39.21% and 29.83% respectively. Nevertheless, we
mention that the weakest pairwise co-movement is maintained between
Notes: Results are based on a TVP-VAR model with lag length of 1 (SIC) and a 10-
CNVE-NATG (0.86%), followed by CRUDOIL-NATG (0.96%). It is also
step-ahead generalized forecast error variance decomposition.
important to mention a drop in the size of pairwise market coefficients
for almost all markets during this war. Such empirical evidence reveals
(45.93%), followed by SPGCLE-ALTE (43.43%) and CNVE-SPGCLE
that the effect of Russia Ukrainian war is less pronounced on market co-
(35.5%) over the full sample. The strong co-movement between these
movements than the COVID-19 outbreak (Shaik et al., 2023; Kumar
markets is consistent with our previous findings, suggesting the sensi­
et al., 2023).
tivity of these markets to tail risk transmissions among them. Never­
Overall, it is worthy to note that that the connectedness across
theless, results show that the weakest cross-market links are found
markets intensify especially during the GFC and the COVID-19 outbreak,
between NATG-CRUDOIL (1.47%) and EEXEUAS-NATG (1.94%).
implying that these two crises exhibit the most significant pronounced
Findings reported in Panel B of Table 3 indicate that the result does
effect on energy market.
not change much during the Global Financial Crisis. The connectedness
of each market pairs is strengthened during the GFC. Specifically, the
4.4. Time-varying tail connectedness
strongest connectedness is maintained between CNVE-ALTE (54.45%),
followed by SPGCLE-ALTE (52.49%) and CNVE-SPGCLE (46.2%). This
Fig. 3 displays the evolution of total spillovers in tail risk over time at
empirical evidence concords with the idea suggesting that the
different levels of significance. Results show that the connectedness in
connectedness across markets exhibited a sharp increase during market
tail risk ranges from 10% to 46% over the whole sample period. From
turmoil (Ma et al., 2022). It is also worthy to note that the weakest co-
this Figure we see that the connectedness is very sensitive to black swan
movements appear also between CRUDOIL-NATGAS (1.65%) and
events. Specifically, the total connectedness reports a record high during
EEXEUAS-NATG (2.28%), which is consistent with our previous
the Global financial crisis with almost 42% and then decreases slightly
findings.
before reaching its maximum around 2012 with about 46%. Afterward,
When shifting our attention to the shale oil revolution period, results
the level of tail-risk connectedness decreased sharply and reaches about
seen in Panel C of Table 3 indicate that the behaviour across markets
20% in 2015 during the shale oil revolution before increasing and then
does not change compared to the Global financial crisis. Noticeably, the
decreasing again to reach its lowest level with approximately 5% during
strongest co-movement was still between CNVE-ALTE (48.25%),
the second quarter of 2019.

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M.A. Naeem and N. Arfaoui Energy Economics 127 (2023) 107082

Since early 2020, the trend of tail-risk spillovers increased dramati­

cally and reaches 37%, followed later by a decrease and then a slight
surge at the end of 2021. The spectacular rising in the total tail-risk
spillovers recorded since 2020 is mostly attributed to the fact that the
World health organization (WHO) who declared COVID-19 as a global
pandemic and the geopolitical tension between Russia and Saudi Arabia
regarding quota production. Furthermore, the drop recorded at the end
of 2021, could be the result of the effectiveness of the COVID-19 vaccine
and the start of economic recovery. Afterward, in early 2022 we see that
the total tail-risk spillovers decrease and followed by a small surge in
2023. This is mostly attributed to the Russia Ukrainian war which
delivered a massive shock to energy markets. Notably, during this war
the global energy market has experienced soaring prices that have hit Fig. 5. Time-varying TOTAL downside risk transmission of markets – Robust­
consumers hard and affect their energy security, resulting in high fluc­ ness.
tuation and disruption on global energy market. Finally, we notice that Notes: Results are based on a TVP-VAR model with SIC, AIC, and HQ criteria
the VaR based on 2.5%, 5%, and 10% metrics move synchronously in the and a 10-step-ahead generalized forecast error variance decomposition. Black
same direction, revealing the robustness of these measures. Overall, we line represents the SIC, while the red(dashed) and the green (dotted) lines
represent the results of the AIC and HQ, respectively. (For interpretation of the
report that the total tail-risk spillover is greatly affected especially
references to colour in this figure legend, the reader is referred to the web
during the GFC, the shale oil revolution and the COVID-19 outbreak.
version of this article.)

4.5. Time-varying NET tail connectedness

period, the trend of measures shown numerous fluctuations of increase
and decrease where the pronounced effect is recorded between 2020 and
Fig. 4 illustrates the time varying total risk connectedness in the
2021 which coincides with the economic downturn recorded during the
sample markets considered in the current study based on TVP-VAR. For
COVID-19 crisis and the geopolitical tension between Saudi Arabia and
clarity, the market is considering as a transmitter (receiver) whether
Russia.
shocks are identified by positive (negative) connectedness values.
Fig. 6 displays the Time-varying NET tail risk transmission of mar­
Interesting findings are reported from this figure. Firstly, crude oil
kets. From this Figure, we see that all markets showed heterogeneous
market appears as net receiver of shocks during the whole sample
behaviors between transmitter and receiver shocks over the full sample
period. This empirical evidence which is in line with the finding of the
period. Specifically, we see that crude oil (natural gas) acting as a strong
study by Okorie and Lin (2022) reveals that crude oil market is well
receiver (transmitter) during the GFC. Results also show that clean en­
integrated with international energy markets.
ergy and alternative electricity appear as major transmitter, whereas
Furthermore, alternative electricity market is shown as net risk
crude oil, natural gas and carbon market acting as major receiver during
transmitter of shocks mostly. The role of alternative electricity market as
the COVID-19 crisis and the Russian invasion of Ukraine. Overall, results
a net transmitter is mostly due to the reduced liquidity level of this
reported in Fig. 5 (6) shown a comparable trend with the primary results
market which makes trading in this asset more cumbersome. In this
reported in Figs. 3 and 4, justifying the robustness and the accuracy of
regard, the investment in illiquid commodity is probably associated with
our main findings.
greater exposure to losses. Results also reveal that the rest of markets (i.
e., conventional electricity, carbon, natural gas and clean energy)
5. Conclusion
considered in the current study exhibit heterogeneous behaviors as they
switch between spillover receiver and transmitter, with carbon market
This paper investigates the tail risk dependence among electricity,
acting mainly as spillover receiver.
conventional energy (i.e., oil, natural gas), carbon and clean energy
markets using both CAViaR and TVP-VAR techniques. Moreover, we
4.6. Robustness test
examine the time-varying NET risk transmissions to check which market
are net transmitters and receivers of spillovers.
To ensure the accuracy of our findings, a robustness test is considered
Findings show that tail risk spillovers intensify especially during the
using the TVP-VAR model. Fig. 5 shows the trend for the SIC, AIC and
GFC, the COVID-19 outbreak and the ongoing Russian Ukrainian war.
HQ which move synchronously over the whole sample period. Specif­
Results of the network connectedness reveal the presence of strong
ically, these three measures shown initially an increasing trend during
clusters across electricity and clean energy markets during crises pe­
the GFC followed by a small drop before reaching its maximum around
riods. Interestingly, findings disclose that the connectedness across these
2012. Afterwards, since the first quarter of 2015 until the end of sample

Fig. 4. Time-varying NET downside risk transmission of markets. Fig. 6. Time-varying NET downside risk transmission of markets – Robustness.
Notes: Results are based on a TVP-VAR model with lag 1 (SIC) and a 10-step- Notes: Results are based on a TVP-VAR model with SIC and a 10-step-ahead
ahead generalized forecast error variance decomposition. generalized forecast error variance decomposition.

11
M.A. Naeem and N. Arfaoui
markets magnified especially during the GFC, and the COVID-19
outbreak. This evidence indicates the highest sensitivity of electricity
and clean energy markets to the GFC and the recent health crisis.
Nevertheless, weak interconnectedness is identified among carbon, oil
and natural gas. Results also show meagre interconnectedness among
electricity (clean energy), carbon and conventional energy markets
during turmoil periods. This empirical evidence highlighted the diver­
sification benefit provided by conventional energy and carbon assets in a
portfolio including electricity and clean energy assets.
Trends of time-varying risk transmissions show that markets faced
extreme risk spillovers at 5% VaR around the GFC, the shale oil revo­
lution, the COVID-19 outbreak and the Russian invasion of Ukraine.
Regarding the NET tail risk connectedness, findings disclose that crude
oil market act as net receiver of shocks during the whole sample period.
Moreover, alternative electricity market appears as net risk transmitter
of shocks mostly. We found also that the rest of considered markets in
the current study shown heterogeneous behaviors as they switch be­
tween spillover receiver and transmitter, with carbon market acting
mainly as spillover receiver.
Overall, our results support the contagion theory which suggests that
the transmission of shock from one market to another during crises time
reveals the presence of contagion effect. Moreover, our findings support
the Black swan theory which supposes that unpredictable events affect
the financial market as a whole. Specifically, Black swan theory can be
to the appearance of financial/economic crises, COVID-19 outbreak,
wars which affect the stability and performance of financial markets and
proved its ability to swamp the whole economies.
Our findings have useful implications for international investors,
portfolio managers and policy makers. Firstly, results of the current
study provide valuable implications as she allows for portfolio managers
and international investors to identify the highest sensitive market to
shocks and to being proactive to establish the appropriate strategies that
allow to mitigate the unexpected risks related to the occurrence of
extreme events. Furthermore, portfolio managers interested on energy
commodities could add carbon and conventional energy assets (e.g., oil,
natural gas) to a portfolio including electricity and clean energy assets to
benefit from diversification during unexpected economic and financial
collapses, geopolitical tensions, and global health crisis. Based on our
findings, regulators bodies and policymakers could also adjust their
policies to overcome the adverse effect of extreme events and to estab­
lish contingency plans for electricity and clean energy markets with the
aim to alleviate the instantaneous effect of unexpected shocks and
without exerting a significant impact on the operation of overall finan­
cial markets. We notice also that the findings of the current study are
useful for policy makers who are invited to promote renewable energy
generation and enhance energy efficiency if governments seeking to
achieve zero carbon emissions economies; stimulate green economic
development and to secure a diversified energy supply. Policymakers are
invited also to rethink about energy tax policies due to their lack of
effectiveness in reducing fossil fuel energy demand and carbon emis­
sions. They’re also invited to rising consumers’ environmental aware­
ness through public campaigns on responsible energy consumption.
Overall, policy makers are highly recommended to developing their
existing policies regarding the reduction of fossil fuel commodities
dependence and the adoption of clean energy sources for power
generation.
With the rising of awareness regarding climate change and the
adverse effect of conventional energy consumption on environment,
clean energy market has recorded exponential development during the
last years. Specifically, clean energy market covers various industries
that aim to reduce carbon emissions and protect the environment. In this
regard, the current study can be extended in several ways. Firstly, we
can add clean alternative markets such as Wilderhill Clean Energy Index
(WILCE), Ardour Solar Energy Index (SOLAR) and therefore identify
which clean energy index is the most connected with electricity and
carbon emission markets. Furthermore, we can extend this study by
12
Energy Economics 127 (2023) 107082
analysing both time and frequency connectedness across Electricity,
Conventional Energy, Carbon, and Clean Energy markets. Specifically, it
will be interesting for market participants to understand the trans­
mission mechanism across the considered markets in this study in the
short, medium and long-term horizons.
Author statement
Muhammad Abubakr Naeem; Conceptualization; Methodology;
Software; Visualization; Writing - Original Draft; Writing - Review &
Editing; Funding Acquisition; Project Administration; Supervision.
Nadia Arfaoui; Conceptualization; Methodology; Writing - Original
Draft; Writing - Review & Editing.
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