Intermarket Risk Transmission Across Energy, Carbon, and Commodities

This chapter mainly reviews three recent articles that examine the patterns of extreme risk connectedness across leading global energy firms, and the excess return co-movement across commodity markets, from a topological perspective to analyze the risk relationships. Among studies focusing on measuring the level of integration in the energy or commodity markets and the potential impacts of exogenous shocks, these studies explicitly study the risk relationships across firms or markets based on multivariate frameworks and seek to detect the structural vulnerability in a risk spillover network. Beyond identifying the systemically important components, these works recognize the leading driving forces of the information and risk spillovers in the energy or commodity system. The critical role of financial market dynamics, including market volatility and investors’ sentiment, is confirmed in terms of affecting risk spillovers and return co-movement on the commodity side. The empirical findings are clearly relevant to policy, as the identification of such a risk-connectedness structure can provide a tool for ex ante risk evaluation to avoid systemic risk contagion and system-wide malfunctioning.