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The higher-order moments connectedness between rare earth and clean energy markets and the role of geopolitical risk:New insights from a TVP-VAR framework

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  • Gao, Wang
  • Wei, Jiajia
  • Zhang, Hongwei
  • Zhang, Haizhen

Abstract

Against the backdrop of escalating geopolitical risks, the interdependence between rare earth and clean energy markets are crucial for cross-market investors and regulators. However, previous research has not adequately examined the higher-order moment connections between these markets. This study addresses this gap by integrating GRACHSK and TVP-VAR methods to explore the asymmetric and tail risk connectedness between rare earth and solar, wind, nuclear, and electric vehicle markets. Further, we investigated how geopolitical risks impact these connections over time. The results reveal significant higher-order moment connectedness between the clean energy and rare earth markets, each serving as an exporter and receiver, respectively. Among these, wind energy and solar energy exhibit significant net spillovers of skewness and kurtosis to rare earths. These high-order moment spillovers are time-varying and exacerbate during major geopolitical crises, such as the COVID-19 pandemic and the Russian-Ukraine war. The portfolios with minimum connectedness are effective at hedging extreme risks, particularly in terms of kurtosis. It implies that portfolios constructed based on higher-order moments can better hedge against extreme risks. GPR exacerbates higher-order moment spillovers between rare earth and clean energy markets in the short- and medium-term. In particular, the impulse response of kurtosis spillovers to GPR shocks shows prominent and frequent fluctuations, indicating that extreme risk spillover effects with significant lag effects would rapidly diffuse across various markets when geopolitical risks occur. The research findings contribute to three aspects: First, the connectedness analysis offers a network and dynamic perspective on extreme risk management between rare earth and clean energy markets. Second, higher-order moments can enhance the returns of diversified cross-market investment portfolios. Third, the conclusions aid in understanding the evolving patterns of rare earth and clean energy markets under geopolitical risk events, facilitating timely investment and regulatory strategies.

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  • Gao, Wang & Wei, Jiajia & Zhang, Hongwei & Zhang, Haizhen, 2024. "The higher-order moments connectedness between rare earth and clean energy markets and the role of geopolitical risk:New insights from a TVP-VAR framework," Energy, Elsevier, vol. 305(C).
    • Handle: RePEc:eee:energy:v:305:y:2024:i:c:s0360544224020541
    DOI: 10.1016/j.energy.2024.132280
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