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Systemic Risk in Energy Derivative Markets: A Graph-Theory Analysis

Abstract:
This article uses graph theory to provide novel evidence regarding market integration, a favorable condition for systemic risk to appear in. Relying on daily futures returns covering a 12-year period, we examine cross-and inter-market linkages, both within the commodity complex and between commodities and other financial assets. In such a high dimensional analysis, graph theory enables us to understand the dynamic behavior of our price system. We show that energy markets--as a whole--stand at the heart of this system. We also establish that crude oil is itself at the center of the energy complex. Further, we provide evidence that commodity markets have become more integrated over time. Keywords: Systemic risk, Energy, Derivative markets, High dimensional analysis, Graph theory, Minimum spanning trees

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Energy Specializations: Energy Investment and Finance – Public and Private Risks, Risk Management; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes:
D81 - Criteria for Decision-Making under Risk and Uncertainty
G13 - Contingent Pricing; Futures Pricing; option pricing
E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination

Keywords: Systemic risk, Energy, Derivative markets, High dimensional analysis, Graph theory, Minimum spanning trees

DOI: 10.5547/01956574.33.3.8


Published in Volume 33, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.