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How Do Oil Shocks Impact Energy Consumption? A Disaggregated Analysis for the U.S.

Thi Hong Van Hoang, Syed Jawad Hussain Shahzad, Robert L. Czudaj, and Javed Ahmad Bhat

Year: 2019
Volume: Volume 40
Number: The New Era of Energy Transition
DOI: 10.5547/01956574.40.SI1.thoa
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Abstract:
This paper investigates the interaction between energy consumption and oil shocks in the U.S. from 1974 to 2018 using monthly data. Its contributions rely on the double disaggregation of energy consumption and oil shocks in a time-varying context. Oil shocks are disaggregated into oil supply, oil demand and aggregated demand shocks following the method of Kilian (2009). Energy consumption is disaggregated according to the production source in distinguishing between renewable and non-renewable energy consumption (hydropower, geothermal, wood, waste, coal, natural gas and petroleum). The impulse response function results show that renewable energy consumption responds the most to aggregate demand and oil supply shocks while for non-renewable energy consumption, it is oil demand shocks. The dynamic connectedness results show that oil supply and demand shocks spillover the most to hydropower consumption while aggregate demand shocks spillover the less. However, these relationships change over time and recommend the flexibility of energy policies.



Comparing the Risk Spillover from Oil and Gas to Investment Grade and High-yield Bonds through Optimal Copulas

Md Lutfur Rahman, Syed Jawad Hussain Shahzad, Gazi Salah Uddin, and Anupam Dutta

Year: 2022
Volume: Volume 43
Number: Number 1
DOI: 10.5547/01956574.43.1.mrah
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Abstract:
This paper compares the tail dependence and risk spillovers from the oil and gas to high-yield (HY) and investment grade (IG) bond markets. We use time-varying optimal copula framework to examine the dependence and further quantify upside and downside risk spillovers. We also explore how energy futures can be used to hedge risk of HY and IG bond portfolios. Our results show that the bond returns are more sensitive to risk shocks in the oil market compared to gas market. We find both negative and positive tail dependence between the bond and energy pairs and the relationship is stronger during the oil-crunch period. The dependence however is asymmetric across the tails. Finally, compared to oil futures, gas futures are found to be better hedge for the bond investment. These results can help in managing portfolio risk and designing optimal asset allocation strategies. These might also assist in formulating policies and regulations to manage the effects of cross-market risk transmissions.



Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks

Elie Bouri and Syed Jawad Hussain Shahzad

Year: 2022
Volume: Volume 43
Number: Special issue
DOI: 10.5547/01956574.43.SI1.ebou
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Abstract:
Using network analysis on the connectedness of default factors in a credit default swap (CDS) dataset of U.S. and European energy firms, we provide the first evidence of differences in the shape and dynamics of the interconnectedness of the level, slope, and curvature, representing long-, short- and middle-term default factors, respectively. The interconnectedness of the three default factors increases during the European sovereign debt crisis (ESDC), whereas only the interconnectedness of the level factor increases during the oil price crash, and the interconnectedness of both level and slope factors spikes during COVID19. European firms contribute more to the transmission of long-term and short-term default risk from early 2011 till the beginning of the 2014–2105 oil price crash; afterwards, U.S. firms are major default transmitters despite some periods of parity with European firms. The impacts of oil demand and supply shocks on the various interconnectedness are quantile-dependent and more pronounced in the long term for the credit risk of the energy firms.



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

Syed Jawad Hussain Shahzad, Román Ferrer, Elie Bouri

Year: 2023
Volume: Volume 44
Number: Number 6
DOI: 10.5547/01956574.44.6.ssha
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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.





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