IAEE Members and subscribers to The Energy Journal: Please log in to access the full text article or receive discounted pricing for this article.

Systemic Risk in the Global Energy Sector: Structure, Determinants and Portfolio Management Implications

Abstract:
We examine the dynamics of tail dependence across returns of 105 global energy firms from 26 countries covering the regions of America, Asia Pacific and Europe. A partial correlation-based approach is used to quantify the dependence structure and level of systemic risk under relatively stable and extremely bearish and bullish market conditions. The dependence network of energy stock returns is constructed based on the novel triangulated maximally filtered graph (TMFG). The results reveal a high degree of tail dependence and role played by geographical proximity. The strongest links are found under extreme bearish market conditions. American and European energy firms are more interconnected and contribute more to systemic risk than Asian-Pacific companies. The dependence intensifies during periods of market turmoil, especially during the COVID-19 pandemic. A higher instability in the dependence structure is observed during extremely bearish market circumstances. A simple portfolio trading strategy based on the dependence ranking of energy firms outperforms a naïve equally-weighted buy-and-hold portfolio strategy.

Download Executive Summary Purchase ( $25 )

Keywords: Systemic risk, Energy stock returns, Tail dependence, Network, Portfolio implications, COVID-19 outbreak

DOI: 10.5547/01956574.44.6.ssha

References: Reference information is available for this article. Join IAEE, log in, or purchase the article to view reference data.

Published in Volume 44, Number 6 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

© 2024 International Association for Energy Economics | Privacy Policy | Return Policy